Credit market frictions and political failure |
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Affiliation: | 1. Duke Clinical Research Institute, Durham, NC, USA;2. Academic Medical Center, University of Amsterdam, Department of Cardiology, Amsterdam, The Netherlands;3. Shaare Zedek Medical Centre, Jerusalem, Israel;4. Columbia University Medical Center and New York-Presbyterian Hospital and the Cardiovascular Research Foundation, NY, New York;5. Yale School of Medicine, New Haven, CT;6. Duke University Medical Center, Department of Cardiology, Durham, NC, USA |
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Abstract: | We study how an excessively favorable regulatory environment for banks could arise even with a perfectly competitive credit market in a median voter world. In our occupational choice model with heterogeneous wealth endowments, market failure due to unobservability of entrepreneurial talent endogenously creates a misalignment between surplus maximizing reforms and reforms that are preferred by the median voter, who is a worker. This is in contrast to the world without market failure where the electorate unanimously vote in favor of surplus maximizing institutional reforms. This paper illustrates how market failure could lead to political failure even in the benchmark political system that is free from capture by interest groups. |
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Keywords: | Occupational choice Adverse selection Property rights Asset liquidation Political failure Market failure |
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