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The Political Economy of Financial Innovation: Evidence from Local Governments

Review of Financial Studies, Forthcoming

61 Pages Posted: 30 Jul 2011 Last revised: 15 Aug 2017

Christophe Perignon

HEC Paris - Finance Department

Boris Vallee

Harvard Business School - Finance Unit

Date Written: Septembre 9, 2016

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 get re-elected, and initially allows them to maintain lower taxes. Our findings illustrate how financial innovation can amplify principal-agent problems within the political system.

Keywords: Financial innovation, Political cycle, Herding, Structured debt

JEL Classification: H74, G11, G32

Suggested Citation

Perignon, Christophe and Vallee, Boris, The Political Economy of Financial Innovation: Evidence from Local Governments (Septembre 9, 2016). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1898965 or http://dx.doi.org/10.2139/ssrn.1898965

Christophe Perignon

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Boris Vallee (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

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