Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2004-01-22
Number: 04-012/2
Author-Name: Enrico Perotti
Author-Email: e.c.perotti@uva.nl
Author-Workplace-Name: University of Amsterdam, and CEPR
Author-Name: Ernst Ludwig von Thadden
Author-Workplace-Name: University of Lausanne, FAME, and CEPR
Title: The Political Economy of Bank- and Market Dominance
Abstract: Legislation affects corporate governance and the return to human and financial capital. We allow the preference of a political majority to determine both the governance structure and the extent of labor rents. In a society where median voters have relatively more at stake in the form of human capital rather than financial wealth, they prefer a less risky environment even when this reduces profits, as labor rents are exposed to undiversifiable firm-specific risk. In general, labor and lenders prefer less corporate risk, since their claims are a concave function of firm profitability. This congruence of interests can lead the political majority to support bank over equity dominance. As shareholdings by the median voters increase, the dominance structure will move towards favoring equity markets with riskier corporate strategies and higher profits.
Classification-JEL: g34; p16
Keywords: corporate governance; corporate finance; political economy; labor income; human capital; median voter
File-Url: https://papers.tinbergen.nl/04012.pdf
File-Format: application/pdf
File-Size: 370672 bytes
Handle: RePEc:tin:wpaper:20040012