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Abstract:
This paper investigates empirically the political determinants of stock market development. We argue that those determinants are grounded in distributional cleavages among voters and interest groups. Our argument reverses the sign of the prevailing explanation about the role of partisanship in the literature, where it is usually assumed that left governments frighten investors. To the extent that financial development is translated into higher levels of investment that increases labor demand, workers and the parties representing them will adopt policies and regulations that favor the capitalization of financial markets. We explore the empirical content of our hypothesis against several competing explanations: the legal origins school, which argues common law proxies stronger investor protections than civil law; the electoral law school, which argues proportional representation provides weaker protections than do majoritarian ones; the institutional economics view, which argues that checks on policymaking discretion such as veto gates protect the property rights of investors and encourage investment. We test the implications of the different arguments on the level of stock market capitalization in a panel of 83 countries over the period 1975-2004. We find preliminary evidence in favor of the partisanship hypothesis: contrary to received wisdom, our results suggest that left-leaning governments are more likely to be associated with higher stock market capitalization than their counterparts to the right and center of the political spectrum. The association between the left and market capitalization is stronger in the 1990s. These results are consistent with recent theories emphasizing an emerging coalition of workers and owners against managers in favor of greater transparency and shareholder protection.

politics, finance, economic development, regulation, political economy

Abstract:
Recognizing that anticompetitive behavior by incumbent businesses can distort free trade in ways similar to tariffs and other regulatory barriers, the World Trade Organization declared competition policy an important "new issue'' and set up a working group to study its relationship with international trade and investment. Progress in reaching an international consensus has been hampered by domestic political considerations, however. What explains variation in governments' commitment to competition policy across countries? I argue that the salient political cleavage pits insiders versus outsiders: a rent-preserving alliance of incumbent producers and affiliated labor opposes competition policies that erode their market dominance; a pro-competition coalition of consumers, unorganized workers, and entrepreneurs favors regulatory oversight. A simple formal model illustrates that policymakers' commitment to competition policy depends on the incentives generated by political institutions, which influence the responsiveness of votes to economic competition. I test the empirical implications of the model in two stages using an original dataset measuring competition agency design in 129 developing countries covering the period 1975-2006. First, I estimate hazard models on the timing of competition policy reform. Second, since "laws on the books'' do not necessarily indicate a commitment to effective policy, I create an original index of antitrust agency effectiveness based on the independence of the agency, resource (budget and staffing) allocations, and actual legal actions. Two robust findings confirm my theoretical propositions: 1) competition for political office speeds up the adoption of competition laws and increases the effectiveness of the regulatory agency; and 2) party-centered electoral rules weaken the commitment to competition policy in countries where the anticompetitive interest group is strong. I find no robust evidence linking trade and capital account openness to effective competition policy.

Competition Policy, International Political Economy, Political Institutions, International Business, Rent-Seeking, Antitrust

Abstract:
What political institutions improve property rights? Building on the work of North and Weingast (1989), this paper argues that institutional checks on policymaking discretion ("veto players") improve the property rights of investors regarding the value of the domestic currency. Veto players constrain the ability of policymakers to opportunistically pursue policy that may lead to a depreciated domestic currency. The study offers some of the first large-sample evidence that checks and balances institutions lower the risk of expropriation, using a direct measure of investors' revealed preferences as the dependent variable. In particular, evidence from 127 countries over the period 1975-2004 shows that the use of foreign currency as a store of value -- a common hedge against domestic currency depreciation -- decreases with the number of veto players in government. The findings are robust to multiple specifications, including instrumental variables models that exploit exogenous sources of institutional variation.

Institutions, Political Economy, Property Rights, Financial Development, Politics, Foreign Exchange

Abstract:
We offer the first firm-level, quasi-experimental evidence on the determinants of property rights protections. Unlike research that uses country-level aggregates to draw inferences about the determinants of secure property rights, we analyze survey responses of over 8000 firm owners from 74 countries. Another innovation is that we use a quasi-experimental research design to establish causality and hold firm- and country-level fixed effects constant. We find that the political partisanship of the government in power strongly affects individual perceptions of property rights: firm owners are more likely to perceive that their property rights are secure under right-leaning, conservative governments. We find little support for the claim that formal political institutions, such as the number of checks and balances (veto players) in a system, improve property rights perceptions. Overall, our results indicate that firm owners’ beliefs about the security of property rights are highly responsive to changes in government partisanship.

Property rights, political institutions, political parties, firm-level data

Abstract:
Analyses of the political economy of exchange-rate policy posit that firms and individuals in different sectors of the economy have distinct policy attitudes toward the level and the stability of the exchange rate. Most such approaches hypothesize that internationally exposed firms prefer more stable currencies, and that tradables producers prefer a relatively depreciated real exchange rate. Sensible as such expectations may be, there are few direct empirical tests of them. We offer micro-level, cross-national evidence on sectoral attitudes over the exchange rate. Using firm-level data from the World Bank's World Business Environment Survey (WBES), we find systematic patterns linking sector of economic activity to exchange-rate policy positions. Owners and managers of firms producing tradable goods prefer greater stability of the exchange rate: in countries with a floating currency, manufacturers are more likely to report that the exchange rate causes problems for their business. With respect to the level of the exchange rate, we find that tradables producers - in particular manufacturers and export producers - are more likely to be unhappy following an appreciation of the real exchange rate than are firms in non-tradables sectors (services and construction). These findings confirm theoretical expectations about the relationship between economic position and currency policy preferences.

international finance, exchange rates, exchange rate regimes, open economy macroeconomics