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Abstract:
This paper explores how organization and contract design has evolved to address regulatory challenges in risk management. In the early part of the century, futures exchanges responded to credit risks by developing clearing houses that act as guarantors. The liability structure of the clearing house involves mutualization of risks through partial permanent integration of the exchange members. Bank clearing houses historically involved contingent integration and risk mutualization during panics. Recent organizational innovations have allowed the risk-control benefits of the clearing house to be replicated in the decentralized over-the-counter derivatives markets. Credit rating agencies and advances in risk modeling are key to permitting the recent dis-integration, which has implications for the scope of public versus private regulation in banking and financial markets.

Abstract:
This paper explores how organization and contract design has evolved to address regulatory challenges in risk management. In the early part of the century, futures exchanges responded to credit risks by developing clearing houses that act as guarantors. The liability structure of the clearing house involves mutualization of risks through "partial permanent" integration of the exchange members. Bank clearing houses historically involved "contingent" integration and risk mutualization during panics. Recent organizational innovations have allowed the risk-control benefits of the clearing house to be replicated in the decentralized over-the-counter derivatives markets. Credit rating agencies and advances in risk modeling are key to permitting the recent "dis-integration," which has implications for the scope of public versus private regulation in banking and financial markets.

Abstract:
The debate over bank powers has taken on special urgency with the recent flurry of proposed mergers, such as the Citicorp-Travelers Group combination, that would break down the barriers between commercial and investment banking. After more than a decade of failed attempts to expand the scope of permissible bank activities, the House of Representatives recently voted for the first time in favor of a bill to end these Depression-era limitations. The issue will be taken up by the Senate this fall. Most of the rationales for regulating banks fall into two broad categories: (1) the need to control potential conflicts of interest stemming from banks' multiple roles as deposit-takers, lenders, securities underwriters, and investment advisers; and (2) the perceived need to protect against the possibility of bank panics and widespread financial instability. In reviewing the historical evidence compiled by banking and finance scholars over the years, this article finds remarkably little cause for concern and suggests the regulatory cure may be far worse than the disease. On the first issue, the article cites a number of recent studies suggesting that market forces deal more effectively than regulation with conflicts of interests that can arise when commercial banks are engaged in securities underwriting. Contrary to the conventional wisdom, investors during the pre-Glass-Steagall era appear to have been better off when they purchased securities from commercial banks rather than investment banks. Moreover, to enhance their credibility in the market, many commercial banks during this period chose to put some distance between their lending and underwriting activities by establishing separate securities affiliates, thereby creating voluntary "firewalls." In examining the issue of how the expansion of bank powers would affect economic stability, the second half of the article cites a large body of research-including studies of different historical periods and countries-attesting to the durability of commercial (and universal) banking systems. Indeed, one of the most important findings issuing from this research is that the regulatory safety net has often had the unfortunate impact of undermining rather than promoting financial stability.

Abstract:
This paper investigates private interest, public interest, and political-institutional theories of regulatory change to analyze state-level deregulation of bank branching restrictions. Using a hazard model, we find that interest group factors related to the relative strength of potential winners (large banks and small, bank-dependent firms) and losers (small banks and the rival insurance firms) can explain the timing of branching deregulation across states during the last quarter century. The same factors also explain congressional voting on interstate branching deregulation. While we find some support for each theory, the private interest approach provides the most compelling overall explanation of our results.

Abstract:
This paper investigates private interest, public interest, and political-institutional theories of regulatory change to analyze state-level deregulation of bank branching restrictions. Using a hazard model, we find that interest group factors related to the relative strength of potential winners (large banks and small, bank-dependent firms) and losers (small banks and the rival insurance firms) can explain the timing of branching deregulation across states during the last quarter century. The same factors also explain congressional voting on interstate branching deregulation. While we find some support for each theory, the private interest approach provides the most compelling overall explanation of our results.

Abstract:
This paper synthesizes literature on the economics of regulation and positive political economy to provide a framework for understanding why certain types of banking and financial regulations arise in particular circumstance and what causes them to change. The analysis focuses on competition among rival interest groups. Technological and economic shocks alter the value of regulation to existing interest groups and their lobbying power, and these shocks recently have been tending to tip the balance in favor of the deregulation. The structure of the public decision-making process plays a role by affecting the willingness of different groups to organize and the influence of those groups as lobbyists. The fiscal demands of the government play an important role. Academics also may play a role by generating ideas and arguments that can increase or decrease the effectiveness of an interest group's lobbying effort. The positive analysis of how regulatory change evolves may ultimately provide normative guidance for those who wish to implement lasting policy reforms in both emerging and developed economies.

Abstract:
This paper synthesizes literature on the economics of regulation and positive political economy to provide a framework for understanding why certain types of banking and financial regulations arise in particular circumstance and what causes them to change. The analysis focuses on competition among rival interest groups. Technological and economic shocks alter the value of regulation to existing interest groups and their lobbying power, and these shocks recently have been tending to tip the balance in favor of the deregulation. The structure of the public decision-making process plays a role by affecting the willingness of different groups to organize and the influence of those groups as lobbyists. The fiscal demands of the government play an important role. Academics also may play a role by generating ideas and arguments that can increase or decrease the effectiveness of an interest group's lobbying effort. The positive analysis of how regulatory change evolves may ultimately provide normative guidance for those who wish to implement lasting policy reforms in both emerging and developed economies.

Abstract:
This paper investigates what factors determine whether a commercial banker is on the board of a non-financial firm. We consider the tradeoff between the benefits of direct bank monitoring to the firm and the costs of active bank involvement in firm management. Given the different payoff structures to debt and equity, lenders and shareholders may have conflicting interests in running the firm. In addition, the U.S. legal doctrines of ?equitable subordination? and ?lender liability? could generate high costs for banks which have a representative on the board of a client firm that experiences financial distress. Consistent with high potential costs of active bank involvement, we find that bankers tend to be represented on the boards of large stable firms with high proportions of tangible (?collateralizable?) assets and low reliance on short-term financing. U.S. bank regulation and bankruptcy doctrines may reduce the role that banks play in corporate governance and the management of financial distress, in contrast to Germany and Japan. We conclude with implications for the current bank regulatory reform debate, such as whether to permit banks to own equity in non-financial firms that, in turn, could allow them to mitigate the conflict.

Abstract:
This article is a reprint of a speech by Randall S. Kroszner, governor, Board of Governors of the Federal Reserve System, on April 3, 2006, at "Issues Related to Central Counterparty Clearing," a joint conference of the Federal Reserve Bank of Chicago and the European Central Bank, held in Frankfurt, Germany, April 3-4, 2006.

central counterparty, CCP, clearing and settlement, risk management, Government Policy and Regulation, Regulated Industries and Administrative Law, Transactional Relationships, Contracts and Reputation, Networks

Abstract:
This paper investigates the frequency of connections between banks and non-financial firms through board linkages and whether those connections affect lending and borrowing behavior. Although a board linkages may reduce the costs of information flows between the lender and borrower, a board linkage may generate pressure for special treatment of a borrower not normally justifiable on economic grounds. To address this issue, we first document that banks are heavily involved in the corporate governance network through frequent board linkages. Banks tend to have larger boards with a higher proportion of outside directors than non-financial firms, and bank officer-directors tend to have more external board directorships than executives of non-financial firms. We then show that low-information cost firms large firms with a high proportion of tangible assets and relatively stable stock returns - are most likely to have board connections to banks. These same low-information cost firms are also more likely to borrow from their connected bank, and when they do so the terms of the loan appear similar to loans to unconnected firms. In contrast to studies of Mexico, Russia and Asia where connections have been misused, our results suggest that avoidance of potential conflicts of interest explains both the allocation and behavior of bankers in the U.S. corporate governance system.

board of directors, banks, lending, corporate governance

Abstract:
This paper provides a positive political economy analysis of the most important revision of the U.S. supervision and regulation system during the last two decades, the 1991 Federal Deposit Insurance Corporation Improvement Act (FDICIA). We analyze the impact of private interest groups as well as political-institutional factors on the voting patterns on amendments related to FDICIA and its final passage to assess the empirical importance of different types of obstacles to welfare-enhancing reforms. Rivalry of interests within the industry (large versus small banks) and between industries (banks versus insurance) as well as measures of legislator ideology and partisanship play important roles and, hence, should be taken into account in order to implement successful change. A "divide and conquer" strategy with respect to the private interests appears to be effective in bringing about legislative reform. The concluding section draws tentative lessons from the political economy approaches about how to increase the likelihood of welfare-enhancing regulatory change.

Abstract:
This paper provides a positive political economy analysis of the most important revision of the U.S. supervision and regulation system during the last two decades, the 1991 Federal Deposit Insurance Corporation Improvement Act (FDICIA). We analyze the impact of private interest groups as well as political-institutional factors on the voting patterns on amendments related to FDICIA and its final passage to assess the empirical importance of different types of obstacles to welfare-enhancing reforms. Rivalry of interests within the industry (large versus small banks) and between industries (banks versus insurance) as well as measures of legislator ideology and partisanship play important roles and, hence, should be taken into account in order to implement successful change. A divide and conquer' strategy with respect to the private interests appears to be effective in bringing about legislative reform. The concluding section draws tentative lessons from the political economy approaches about how to increase the likelihood of welfare-enhancing regulatory change.

Abstract:
This paper investigates how organizational structure can affect a firm's ability to compete. In particular, we examine the two ways in which U.S. commercial banks organized their investment banking operations before the 1933 Glass-Steagall Act forced the banks to leave the securities business: as an internal securities department within the bank and as a separately incorporated and capitalized securities affiliate. We document a strong movement toward the use of the affiliate structure during the 1920s, and regulation does not appear to explain this evolution. While departments underwrote seemingly higher quality firms and securities than did comparable affiliates, the departments obtained lower prices for the issues they underwrote. This evidence is consistent with the hypothesis that there was a perception of potential conflicts of interest when lending and underwriting were closely combined in the departmental structure. We find evidence that bank managers during this period were concerned about such perceptions. We then develop further tests to support the view that by distancing underwriting activities from lending operations, banks could more credibly certify the quality of the issues they underwrote, thereby obtaining higher prices for them. Our results suggest that internal organization may indeed affect the activities and effectiveness of a firm. They also suggest that bank regulators' interest in 'firewalls' between commercial and investment banking may be reasonable, but that the market may propel banks to adopt an internal structure that would address regulators' concerns.

Abstract:
The following is a description of the paper, and not the actual abstract:
This paper investigates empirically whether the internal organization of the firm can play an important role in affecting a firm's ability to commit to a particular quality of business practices and, if so, whether competition would be sufficient to lead firms to adopt that structure. In particular, we study how commercial banks have developed "firewalls" to address potential conflicts of interest when they are also engaged in investment banking. Before the 1933 Glass-Steagall Act forced banks out of investment banking, commercial banks organized their securities activities in two ways: as an internal securities department within the bank and as a separately incorporated affiliate with its own board of directors.

Although the internal departments underwrote seemingly higher quality firms and securities than did comparable affiliates, the departments obtained lower prices for the issues they underwrote. The greater risk premium associated with the internal department is consistent with investors discounting for the greater likelihood of conflicts of interest when lending and underwriting are within the same structure. Commercial banks responded to this pricing disadvantage for the internal departments by moving strongly toward adopting the separate affiliate structure during the period. We find that increasing the proportion of affiliate directors who are independent from the parent bank reduced the risk premium for the securities underwritten by the affiliate. Independent directors thus appear to have provided an important mechanism by which the affiliates could enhance their credibility in the market. Overall, our results suggest that organizational design can be an effective commitment device and, absent other distortions, competitive pressures would provide sufficient incentives for banks to adopt an organizational design that would address regulatory concerns about potential conflicts of interest.

Abstract:
We examine the two ways in which U.S. commercial banks organized their investment banking operations before the 1933 Glass-Steagall Act forced the banks to leave the securities
business: as an internal securities department within the bank and as a separately incorporated affiliate with its own board of directors. While departments underwrote seemingly higher
quality firms and securities than did comparable affiliates, the departments obtained lower prices for the issues they underwrote. The higher risk premium associated with the internal department is consistent with investors discounting for the greater likelihood of conflicts of interest when lending and underwriting are within the same structure. As a result, commercial banks evolved toward choosing the separate affiliate structure. Our results suggest that internal structure is an effective commitment mechanism, and absent other distortions, market pressures would propel banks to adopt an internal structure that would address regulators' concerns about conflicts of interest.

Abstract:
Laeven, Klingebiel, and Kroszner investigate the link between financial crises and industry growth. They analyze data from 19 industrial and developing countries that have experienced financial crises during the past 30 years to investigate how financial crises affect sectors dependent on external sources of finance. Specifically, the authors examine whether the impact of a financial crisis on externally dependent sectors varies with the depth of the financial system. They find that sectors highly dependent on external finance tend to experience a greater contraction of value added during a crisis in deeper financial systems than in countries with shallower financial systems. They hypothesize that the deepening of the financial system allows sectors dependent on external finance to obtain relatively more external funding in normal periods, so a crisis in such countries would have a disproportionately negative effect on externally dependent sectors. In contrast, since externally dependent firms tend to obtain relatively less external financing in shallower financial systems (and hence have relatively lower growth rates in such countries during normal times), a crisis in such countries has less of a disproportionately negative effect on the growth of externally dependent sectors.

This paper - a product of the Financial Sector Strategy and Policy Department - is part of a larger effort in the department to study the link between financial development and economic growth. The authors may be contacted at llaeven@worldbank.org, dklingebiel@worldbank.org, or randy.kroszner@gsb.uchicago.edu.

Abstract:
In the past few decades, most state legislatures fundamentally reformed and deregulated the banking industry by adopting new laws on branching and other banking activities. Because those efforts took place on a state-by-state basis, the reforms offer a rich laboratory in which to investigate what drives deregulation. Did banking deregulation happen first in states in which people would most benefit from reform, or in states in which well-organized political groups had the most to gain from deregulation? The author's analysis of branching deregulation suggests the latter explanation, known as the private interest theory of government action, best accounts for the pattern of banking reform that unfolded in the last 30 years.

Abstract:
During a crisis of confidence, announcements of deposit guarantees may give market participants short-term comfort. But stock market responses show that using public funds for bank bailouts is not a credible way to restore the health of the financial sector.

The East Asian crisis began in Thailand in mid-1997 when an ailing financial sector, a slowdown in exports, and large increases in central bank credit to weak financial institutions triggered a run on the baht. Then the crisis spread to other countries in the region as common vulnerabilities and revaluations of risk in emerging markets triggered large capital outflows.

To better understand the impact of different policy responses to financial crises, Klingebiel, Kroszner, Laeven, and van Oijen investigate how stock markets in East Asian countries reacted to the initial policy announcements of bank and financial restructuring - especially how banking and nonfinancial sectors in Indonesia, the Republic of Korea, Malaysia, and Thailand fared in response to announcements of different restructuring measures.

They find that prices of bank stocks responded positively to announcements about government guarantees of bank liabilities. Nonfinancial companies gained in value when guarantees were announced, but their stock prices were negatively affected by announcements favoring public recapitalization schemes and generous liquidity support programs.

Possibly the market was concerned that public funds per se would not restore the health of the financial sector - that they would not be sufficient or would not be used to restructure bank balance sheets and operations and allow banks to engage in meaningful corporate restructuring. The announcements of increased public support may have been viewed as a signal that the financial institutions were in a financially weaker position than previously thought.

This paper - a product of the Financial Sector Strategy and Policy Department - is part of a larger effort in the department to better understand the costs and benefits of different measures for resolving financial crisies. The authors may be contacted at dklingebiel@worldbank.org or llaeven@worldbank.org.

Abstract:
Scotland's nineteenth-century experience with free banking offers lessons to inform contemporary policymakers. A relatively unregulated banking system may be a wise option for emerging markets, if high liability limits can be enforced.

The notion of free banking is at least as difficult to define as the notion of central banking. Instead, Kroszner focuses on a relatively unregulated banking system that operated in Scotland in the eighteenth and nineteenth centuries (Sweden adopted a similar system). Kroszner argues that a relatively unregulated system is a wise option for emerging markets today, which exhibit many features of the eighteenth and nineteenth century Scottish economy. In terms of private institutions and monitoring (typically thought to be a central bank responsibility:

A private clearing system is feasible.

So are private development and enforcement of capital and liquidity standards.

Financial institutions have strong private incentives to create their own clearing system, to benefit both banks and the public. In creating such a system, the institutions develop standards for capital, liquidity, and prudential management that will become requirements for membership in the system. Modern examples: The Chicago Board of Trade and Chicago Mercantile Exchange.

Competition is generally compatible with prudence and coordination (although the excessive note issue by the Ayr Bank demonstrates that the system did not eliminate all rogues). The Ayr Bank is the only major exception to the smooth operation of Scotland's private clearing and monitoring system in more than a century, and the system helped to contain the problems from this bank's collapse, fulfilling a role typically considered to belong to a central bank.

There are private alternatives to deposit insurance or to a central bank to maintain confidence in and foster the stability of the financial system.

Sophisticated note and deposit contracts are feasible.

Free entry is important to encourage innovation.

Branching and portfolio diversification can substitute for deposit insurance, to stabilize the banking system. So can extended liability (beyond simple limited liability of the shareholders), to give depositors and note holders some assurance that a bank could withstand a negative shock. Another alternative to deposit insurance is theoption clause or other contingent or equity-like contracts, which can solve or minimize the problem of bank runs. Is any role left for a central bank as lender of last resort? An explicit central bank may not be needed, but rather mechanisms to provide added liquidity, perhaps through the clearing system, in times of trouble.

This paper - a joint product of the Finance and Private Sector Development Division, Policy Research Department, and the Financial Sector Development Department - was presented at a Bank seminar, Financial History: Lessons of the Past for Reformers of the Present, and is a chapter in a forthcoming volume, Reforming Finance: Some Lessons from History, edited by Gerard Caprio, Jr. and Dimitri Vittas.

Abstract:
This paper investigates how changes in both institutional incentives and economic interests are important for securing durable changes in economic policy. We study how bipartisan support developed to sustain the Reciprocal Trade Agreements Act (RTAA) of 1934, which fundamentally transformed U.S. trade policy. The durability of this change was achieved only when the Republicans, long-time supporters of high tariffs who originally vowed to repeal the RTAA, began to support this Democratic initiative in the 1940s. We find little evidence of an ideological shift among Republicans, but rather an increased sensitivity to export interests for which the institutional structure of the RTAA itself may have been responsible. We conclude that the combination of greater export opportunities and the institutional change which strengthened exporters' lobbying position was required to bring about Republican support for trade liberalization.

Abstract:
This paper investigates how changes in both institutional incentives and economic interests are important for securing durable changes in economic policy. We study how bipartisan support developed to sustain the Reciprocal Trade Agreements Act (RTAA) of 1934, which fundamentally transformed U.S. trade policy. The durability of this change was achieved only when the Republicans, long-time supporters of high tariffs who originally vowed to repeal the RTAA, began to support this Democratic initiative in the 1940s. We find little evidence of an ideological shift among Republicans, but rather an increased sensitivity to export interests for which the institutional structure of the RTAA itself may have been responsible. We conclude that the combination of greater export opportunities and the institutional change which strengthened exporters' lobbying position was required to bring about Republican support for trade liberalization.

Abstract:
A paper presented at the June 2000 conference "Specialization, Diversification, and the Structure of the Financial System: The Impact of Technological Change and Regulatory Reform," sponsored by the Federal Reserve Bank of New York.

financial modernization, deregulation, political choice

Abstract:
This paper investigates what factors determine whether a commercial banker is on the board of a non-financial firm. We consider the tradeoff between the benefits of direct bank monitoring to the firm and the costs of active bank involvement in firm management. Given the different payoff structures to debt and equity, lenders and shareholders may have conflicting interests in running the firm. In addition, the U.S. legal doctrines of "equitable subordination" and "lender liability" could generate high costs for banks which have a representative on the board of a client firm that experiences financial distress. Consistent with high potential costs of active bank involvement, we find that bankers tend to be represented on the boards of large stable firms with high proportions of tangible ("collateralizable") assets and low reliance on short-term financing. The protection of shareholder versus creditor rights under the U.S. bankruptcy doctrines may reduce the role that banks play in corporate governance and the management of financial distress, in contrast to Germany and Japan. We conclude with implications for the current bank regulatory reform debate, such as whether to permit banks to own equity in non-financial firms that, in turn, could allow them to mitigate the conflict.

Abstract:
In the aftermath of terrorist attacks of September 11, 2001, an important public policy question arose as to whether, and how, the federal government should intervene to provide a temporary backstop for property/casualty terrorism insurance. This paper examines several economic justifications for intervention and the rationale behind the Administration's proposal for a temporary and limited government program.

Abstract:
The terrorist attacks of September 11, 2001 represented a loss for commercial property & casualty insurers that was both unprecedented and unanticipated. After sustaining this record capital loss, the availability of adequate private insurance coverage against future terrorist attacks came into question. Concern over the potential adverse consequences of the lack of availability of insurance against terrorist incidents led to calls for federal intervention in insurance markets. This paper discusses the economic rationale for and against federal intervention in the market, and concludes that the benefits from establishing a temporary transition program, during which the private sector can build capacity and adapt to a dramatically changed environment for terrorism risk, may provide benefits to the economy that exceed the direct and indirect costs.

Abstract:
We document that ownership by officers and directors of publicly-traded firms is on average higher today than earlier in the century. Managerial ownership rises from 13 percent for the universe of exchange-listed corporations in 1935, the earliest year for which such data exist, to 21 percent in 1995. We examine in detail the robustness of the increase and explore hypotheses to explain it. Higher managerial ownership has not substituted for alternative corporate governance mechanisms. Lower volatility and greater hedging opportunities associated with the development of financial markets appear to be important factors explaining the increase in managerial ownership.

Abstract:
This paper investigates the growth impact of banking crises on industries with different levels of dependence on external sources of finance to analyze the mechanisms linking financial shocks and real activity. If the banking system is the key element allowing credit constraints to be relaxed, then a sudden loss of these intermediaries in a system where such intermediaries are important should have a disproportionately contractionary impact on the sectors that flourished due to their reliance on banks. Using data from 38 developed and developing countries that experienced financial crises during the last quarter century, we find that sectors highly dependent on external finance tend to experience a substantially greater contraction of value added during a banking crisis in deeper financial systems than in countries with shallower financial systems. On average, in a country experiencing a banking crisis, a sector at the 75th percentile of external dependence and located in a country at the 75th percentile of private credit to GDP would experience a 1.6 percent greater contraction in growth in value added between the crisis and pre-crisis period than a sector at the 25th percentile of external dependence and private credit to GDP. This effect is sizeable compared with an overall mean decline in growth of 3.5 percent between these two periods. Our results, however, do not suggest that on net the externally dependent firms fare worse in deep financial systems.

banking and financial crises, financing constraints, financial development, credit channel

Abstract:
This paper investigates the frequency of connections between banks and non-financial firms through board linkages and whether those connections affect lending and borrowing behavior. Although a board linkages may reduce the costs of information flows between the lender and borrower, a board linkage may generate pressure for special treatment of a borrower not normally justifiable on economic grounds. To address this issue, we first document that banks are heavily involved in the corporate governance network through frequent board linkages. Banks tend to have larger boards with a higher proportion of outside directors than non-financial firms, and bank officer-directors tend to have more external board directorships than executives of non-financial firms. We then show that low-information cost firms - large firms with a high proportion of tangible assets and relatively stable stock returns - are most likely to have board connections to banks. These same low-information cost firms are also more likely to borrow from their connected bank, and when they do so the terms of the loan appear similar to loans to unconnected firms. In contrast to studies of Mexico, Russia and Asia where connections have been misused, our results suggest that avoidance of potential conflicts of interest explains both the allocation and behavior of bankers in the U.S. corporate governance system.

Abstract:
This paper examines the key forces behind deregulation in order to assess the relative importance of alternative theories of regulatory entry and exit. We focus on bank branching deregulation across the states which began a quarter century ago and cumulated in federal deregulation in 1994. The cross-sectional and time-series variation of branching deregulation allows us to develop a hazard model to explain the timing of deregulation across the states using proxies motivated by private-interest, public-interest, and political-institutional theories, the public interest approach cannot easily explain our findings that deregulation occurs later in states with relatively more small banks and with a relatively large insurance sector in states where banks can sell insurance. We also find that the ex post consequences of deregulation for the different interest groups are consistent with the ex ante lobbying patterns we infer from the hazard model. Some political-institutional factors also play a role in the process of regulatory change. The same forces that explain the timing of deregulation across the states also explain the pattern of voting in Congress on interstate branching deregulation. We conclude by considering the implications of our results for tyhe future path of deregulation and applications of our research design to other episodes of regulatory entry and exit.

Abstract:
Do politicians tend to follow a strategy of ambiguity in their policy positions or a strategy of reputational development to reduce uncertainty about where they stand? Ambiguity could allow a legislator to avoid alienating constituents and to play rival interests off against each other to maximize campaign contributions. Alternatively, reputational clarity could help to reduce uncertainty about a candidate and lead to high campaign contributions from favored interests. We outline a theory that considers conditions under which a politician would and would not prefer reputational development and policy-stance clarity in the context of repeat dealing with special interests. Our proxy for reputational development is the percent of repeat givers to a legislator. Using data on corporate political action committee contributions (PACs) to members of the U.S. House during the seven electoral cycles from 1983/84 to 1995/96, we find that legislators do not appear to follow a strategy of ambiguity and that high reputational development is rewarded with high PAC contributions.

Abstract:
This paper investigates the factors explaining significant policy change by studying how bipartisan support developed to sustain the Reciprocal Trade Agreements Act (RTAA) of 1934. The RTAA fundamentally transformed both the process and outcome of U.S. trade policy: Congress delegated its authority over tariff-setting to the president sharply toward trade liberalization. The durability of this change was achieved only when the Republicans, long-time supporters of high tariffs who originally vowed to repeal the RTAA, began to support this Democratic initiative in the 1940s. In seeking to explain this conversion, we find little evidence of an ideological shift among Republicans, but rather an increased sensitivity to export interests for which the institutional structure of the RTAA itself may have been responsible. Our results suggest that analyzing changes in both institutional incentives and economic interests are important for understanding lasting change in economic policy.

Abstract:
This paper investigates the factors explaining significant policy change by studying how bipartisan support developed to sustain the Reciprocal Trade Agreements Act (RTAA) of 1934. The RTAA fundamentally transformed both the process and outcome of U.S. trade policy: Congress delegated its authority over tariff-setting to the president sharply toward trade liberalization. The durability of this change was achieved only when the Republicans, long-time supporters of high tariffs who originally vowed to repeal the RTAA, began to support this Democratic initiative in the 1940s. In seeking to explain this conversion, we find little evidence of an ideological shift among Republicans, but rather an increased sensitivity to export interests for which the institutional structure of the RTAA itself may have been responsible. Our results suggest that analyzing changes in both institutional incentives and economic interests are important for understanding lasting change in economic policy.

Abstract:
We analyze Senate roll-call votes concerning tariffs on specific goods in order to understand the economic and political factors influencing the passage of the Smoot-Hawley Tariff Act of 1930. Contrary to recent studies emphasizing the partisan nature of the Congressional votes, our reading of the debates in the 'Congressional Record' suggests that the final, party-line voting masks a rich vote-trading dynamic. We estimate a logit model of specific tariff votes that permits us to identify (a) important influences of specific producer beneficiaries in each Senator's constituency and (b) log-rolling coalitions among Senators with otherwise unrelated constituency interests which succeeded in raising tariff rates.

Abstract:
In this paper the author argues that cross-border, intra-European bank mergers are likely to generate benefits similar to those enjoyed in the United States when interstate banking restrictions were removed. These benefits include greater banking efficiency, higher economic and employment growth, more entrepreneurial activity, and reduced economic volatility.

Abstract:
This paper develops a positive theory of how competition among political pressure groups shapes the organization of Congress and tests the theory using data on political action committees (PACs) in the financial services industries. For the Members of Congress, the first-best way to maximize PAC contributions would be auction their legislative service time for a fee to the highest bidders. Such contracts, however, are considered bribery and are not legally enforceable. The Congressional committee system may arise, we argue, as a second-best solution to mitigate the agency problems when "fee-for-service" contracts are not available. The committee system fosters repeated interactions and long-term relationships between the PACs and the members of the relevant committees. This structure facilitates the development of reputations which can reduce the uncertainty both for the PACs and for the members and thereby increase contributions.We then find supporting evidence in both cross-sectional and time-series contribution patterns. First, on the House Banking Committee, where relationships are high and uncertainty is low, the competing groups specialize their contributions by giving large amounts to different committee members. In contrast, for legislators who are not members of the Banking Committee, where relationships are low and uncertainty is high, the competing PACs simply match each others' low level of contributions. Second, as each member of the House Banking committee develops his reputation through time (hence reduces uncertainty), the sources of PAC contributions for that member become more concentrated in one of the rival groups. We conclude with implications of our theory for the effects of term limits, party discipline, and corruption on the organization of Congress.

Abstract:
We document that ownership by officers and directors of publicly-traded firms is on average higher today than earlier in the century. Managerial ownership rises from 13 percent for the universe of exchange-listed corporations in 1935, the earliest year for which such data exist, to 21 percent in 1995. We examine in detail the robustness of the increase and explore hypotheses to explain it. Higher managerial ownership has not substituted for alternative corporate governance mechanisms. Lower volatility and greater hedging opportunities associated with the development of financial markets appear to be important factors explaining the increase in managerial ownership.

Abstract:
This paper studies how ownership and governance of publicly-traded corporations have evolved since the Great Depression. Despite the widespread view from Berle and Means (1932) onward that ownership of firms is increasingly separated from managerial control of those firms, almost no time-series research exists to investigate this question. A previously neglected 1935 ownership survey of all exchange-traded firms undertaken by the Securities and Exchange Commission provides the earliest available source on ownership for a large cross-section of U.S. firms. We collect other firm-level data from the Moody's Manuals to create a comprehensive data base of roughly 1,600 publicly-traded firms from 60 years ago. For the 1990s, we create a modern comparison sample of approximately 5,000 exchange-listed firms using CD-ROM data bases. Contrary to Berle and Means (1932), we find that managerial ownership of publicly-traded firms has increased, not decreased, during the century. The average percentage of shares held by a firm's officers and directors has risen from 13 percent to 22 percent between 1935 and 1995. We then investigate possible explanations for the increase in managerial ownership. In doing so, we also will be illustrating how access to the public capital markets has evolved as the markets and regulations have changed. Among the alternative explanations we examine are changes in: the selection, age, and industry mix of publicly-traded firms, the use of alternative mechanisms to align the incentives of managers with owners, the relationship between ownership and performance, and the determinants of "optimal" ownership structure. Age and industry composition do not seem to account for the changes, and the ownership-performance relationship appears to be stable over time. Our preliminary results suggest that the high volatility of the financial markets earlier in the century may be an important factor contributing to lower "optimal" managerial ownership (due to either risk-aversion or greater difficulty of diversification) then than now. In addition to addressing basic issues in the theory of the firm, the results of this study highlight the importance of understanding how capital markets and corporate governance systems develop and interact in order to inform debates concerning the financial reform in both developed and emerging market economies.

Abstract:
This paper investigates empirically whether the internal organization of the firm can play an important role in affecting a firm's ability to commit to a particular quality of business practices and, if so, whether competition would be sufficient to lead firms to adopt that structure. In particular, we study how commercial banks have developed "firewalls" to address potential conflicts of interest when they are also engaged in investment banking. Before the 1933 Glass-Steagall Act forced banks out of investment banking, commercial banks organized their securities activities in two ways: as an internal securities department within the bank and as a separately incorporated affiliate with its own board of directors.

Although the internal departments underwrote seemingly higher quality firms and securities than did comparable affiliates, the departments obtained lower prices for the issues they underwrote. The greater risk premium associated with the internal department is consistent with investors discounting for the greater likelihood of conflicts of interest when lending and underwriting are within the same structure. Commercial banks responded to this pricing disadvantage for the internal departments by moving strongly toward adopting the separate affiliate structure during the period. We find that increasing the proportion of affiliate directors who are independent from the parent bank reduced the risk premium for the securities underwritten by the affiliate. Independent directors thus appear to have provided an important mechanism by which the affiliates could enhance their credibility in the market. Overall, our results suggest that organizational design can be an effective commitment device and, absent other distortions, competitive pressures would provide sufficient incentives for banks to adopt an organizational design that would address regulatory concerns about potential conflicts of interest.

Abstract:
During the 1980s, insolvency of individual thrifts and the thrift deposit insurer created severe incentive problems. Lacking cash to close insolvent thrifts, regulators induced nearly $10 billion of private capital to flow into the industry through mutual-to-stock conversions. We test a theory of how regulators encouraged capital-impaired mutual thrifts to convert by permitting them to pay dividends rather than rebuild capital. We estimate the costs of this policy and interpret the 1991 Federal Deposit Insurance Corporation Improvement Act as requiring regulators to impose restraints on depository institutions parallel to debt covenants that prevent capital distributions by non- financial firms experiencing distress.