The Political Economy of Financial Innovation: Evidence from Local Governments. (3rd April 2017)

• Record Type: Journal Article
• Authors: Pérignon, Christophe; Vallée, Boris
• Is Part Of: Review of financial studies. Volume 30:Number 6(2017:Jun.)
• Page Start: 1903
• Page End: 1934
• Publication Date: 2017-04-03
• Subjects: P16 -- H74 -- G11 -- G32; Finance -- United States -- Periodicals; Finance -- Periodicals; 332
• DOI: 10.1093/rfs/hhx029
• Languages: English
• ISSNs: 0893-9454

Abstract

Abstract : We investigate the development of an innovative and high-risk type of borrowing for local governments, known as structured loans. Using transaction data for more than 2, 700 local governments in France, we show that the adoption of these instruments is more frequent for politicians from highly indebted local governments, from politically contested areas, and during political campaigns. Taking on structured loans helps incumbents win a reelection, and initially allows them to maintain lower taxes. Our findings illustrate how financial innovation can amplify principal-agent problems within the political system. Received 14 March 2016; editorial decision 4 December 2016 by Editor Andrew Karolyi.