Banking Crises and the Effect of Political Checks and Balances on Special Interest Influence

38 Pages Posted: 1 Nov 2001

See all articles by Philip Keefer

Philip Keefer

Inter-American Development Bank

Date Written: October 2001

Abstract

This paper develops and tests a model of the effect of political checks and balances on the incentives of elected veto players to cater to special interests. A larger number of veto players reduces political incentives to make deals with special interests, but the effect is declining in the rents available from such deals. Evidence from country responses to banking crises supports these conclusions: governments make smaller fiscal transfers to the financial sector and are less likely to exercise forbearance in dealing with insolvent financial institutions the larger the number of political veto players, conditional on the value of rents at stake. This simple explanation for special interest influence is robust to controls for more subtle institutional effects that are prominent in the literature, including the competitiveness of elections, regime type (presidential versus parliamentary) and electoral rules (majoritarian versus proportional).

Keywords: Special interests, veto players, checks and balances, financial crisis

JEL Classification: D72, G28

Suggested Citation

Keefer, Philip, Banking Crises and the Effect of Political Checks and Balances on Special Interest Influence (October 2001). Available at SSRN: https://ssrn.com/abstract=289112 or http://dx.doi.org/10.2139/ssrn.289112

Philip Keefer (Contact Author)

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