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Sharing the Future: Financial Innovation and Innovators in Solving the Political Economy Challenges of Development

Saumitra Jha

Stanford Graduate School of Business

October 1, 2011

Masahiko Aoki, Timur Kuran and Gerard Roland eds., 'Institutions and Comparative Economic Development', (International Economic Association Proceedings, Vol 150-1), November 2012, Palgrave MacMillan, (Revised)
Stanford GSB Working Paper No. 2093

The failure to align the incentives of self-interested groups in favor of beneficial reform is often considered a major cause of persistent underdevelopment around the world. However, much less is known about strategies that have been successful at overcoming such political economy challenges. One approach that holds much promise, and in fact appears to have had some historical success, is the provision of financial assets that align the interests of winners and potential losers from reform by providing claims on the future. This paper analyzes the role of financial instruments as a means for fostering broad political coalitions that favor beneficial reforms. It takes as a departure point the benchmark theory of portfolio choice, in which all agents hold the same (market) portfolio and thus all beneficial reforms are adopted. It then analyzes a range of historical cases in which innovative financial assets, often introduced by technocratic reformers, have succeeded at making politics less conflictual overtime, focusing on three revolutionary states that subsequently led the world in economic growth: England, the early United States and Meiji Japan. The paper draws upon the theory and the historical cases to assess the promise of finance in solving political economy challenges in contemporary settings.

Number of Pages in PDF File: 25

Keywords: economic development, bonds, reform, finance, community development, growth, revolution

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Date posted: February 7, 2012 ; Last revised: January 17, 2015

Suggested Citation

Jha, Saumitra, Sharing the Future: Financial Innovation and Innovators in Solving the Political Economy Challenges of Development (October 1, 2011). Stanford GSB Working Paper No. 2093. Available at SSRN: https://ssrn.com/abstract=2001039 or http://dx.doi.org/10.2139/ssrn.2001039

Contact Information

Saumitra Jha (Contact Author)
Stanford Graduate School of Business ( email )
655 Knight Way
Stanford, CA 94305-5015
United States

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