1,721,051 research outputs found
Reward from public office, and the selection of politicians by parties
Full text linkWe investigate the relationship between the quality of politicians, defined in terms of their competence (skills), and rewards from public office in a game between parties and citizens in which parties play a crucial role in the selection of politicians. Parties shape the selection of politicians by manipulating information about the quality of their candidates. An increase in the rewards from public offices leads to two opposing effects on the average quality of politicians. The first is a selection effect, whereby more skilled citizens enter politics, leading to an increase in average quality. The second is a manipulation effect, as parties have the incentive to further manipulate information so to increase the probability of election for their unskilled candidates, from whom they can extract higher rents in the form of service duties. We find that the second effect dominates when i. parties’ costs of manipulating information are sufficiently low; ii. even in the absence of manipulation, the quality of information available to citizens about candidates is sufficiently poor; and iii. the net gains from becoming a politician for unskilled citizens are sufficiently larger than those for skilled citizens. These findings provide a rationale for the ambiguous sign of the empirical relationship between the quality and pay of politicians
Banks' Liquidity Management and systemic risk
No full textWe study a novel mechanism to explain the interaction between banks’ liquidity management and the emergence of systemic financial crises, in the form of self-fulfilling runs. To this end, we develop an environment where banks offer insurance to their depositors against both idiosyncratic and aggregate real shocks, by holding a portfolio of liquidity and productive but illiquid assets. Moreover, banks’ asset portfolios and the probability of a depositors’ self-fulfilling run are jointly determined via a “global game”. We characterize the sufficient conditions under which there exists a unique threshold recovery rate, associated with the early liquidation of the productive assets, below which the banks first employ liquidity and then liquidate, in order to finance depositors’ early withdrawals. Ex ante, the banks hold more liquidity than in a full-information economy, where there are no self-fulfilling runs and risk is only due to idiosyncratic and aggregate real shocks
Concentration in the Banking Industry and Economic Growth
Full text linkWe present an endogenous growth model with two sectors: a real sector where the final good is produced, and a banking sector that intermediates between savers and firms. Banking concentration exerts two opposite effects on growth. On the one hand, it induces economies of specialization, which is beneficial to growth. On the other hand, it results in duplication of banks' investment in fixed capital, which is detrimental to growth. The trade-off between the two opposing effects is ambiguous and can vary along the process of economic development. Hence, there is a potential nonlinear and nonmonotonic relationship between concentration and growth. We test this implication, using cross-country data on income and industry growth. We find that banking concentration is negatively associated with per-capita income growth and industrial growth only in low-income countries. This suggests that reducing concentration is more likely to promote growth in low-income countries than in high-income ones
Interaction between economic and financial developmment
No full textThis paper presents a model of financial and economicdevelopment which assumes the consumption of real resources by the financial sector. Financialdevelopment occurs endogenously as the economy reaches a critical threshold of economicdevelopment. Compared to financial autarky, financial intermediaries allocate savings, net of their costs of operation, to more productive investments. Whenever the technology financed by intermediaries is more capital-intensive than that operated in financial autarky, the growth effect of financialdevelopment is ambiguous. As a result, financialdevelopment may be unsustainable. However, when financialdevelopment is sustainable, the credit market becomes more competitive and more efficient over time, and this could eventually contribute to economic growth. Nonetheless, given monopolistic competition in the financial sector, the level of entry into the credit market is generally inefficient. For instance, with diminishing returns to specialisation, entrants might be too few at the early stages of economicdevelopment and too many later on
Interaction between economic and financial development
No full textThis paper presents a possible explanation of the interactive nature of the relationship between economic and financial development based on absorption of resources by the financial sector, and constant returns to physical capital accumulation in the production sector. Financial intermediaries operating in a credit market characterised by monopolistic competition emerge along with the process of economic development. This could initially have a detrimental effect on growth, so that the economy might be trapped in a low development region. If not, subsequent economic development stimulates competition among financial intermediaries which results in more efficient financial transactions, and therefore higher growth. While higher efficiency is always associated with higher growth, the laissez faire economy can still be characterised by sub-optimal levels of financial development
Financial institutions' expertise and growth effects of financial liberalisation
Full text linkThis paper analyses the real effects of financial development subsequent to financial liberalisation in an economy with risk averse savers and learning by lending. Transition from full financial repression to full financial liberalisation might initially slow down the growth process or even induce a recession, whenever the initial level of valuable investments known by the financial instutions (informed capital ) is suficiently scanty. However, lending activity leads to accumulation of information (learning by lending) regarding valuable investments. This way, as intermediaries become experts, the allocative efficiency they are able to guarantee ameliorates so that, in the long run, the effects of financial liberalisation are eventually positive
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