Regulatory Cycles: A Political Economy Model

40 Pages Posted: 12 Mar 2018 Last revised: 26 Jul 2021

See all articles by Pooya Almasi

Pooya Almasi

Georgetown University - Department of Economics

Jihad C. Dagher

Milken Institute; Department of Economics | University of Southern California ; Goethe University | House of Finance

Carlo Prato

Columbia University - Department of Political Science

Date Written: March 7, 2018

Abstract

Financial regulatory policy in the U.S. has been conspicuously pro-cyclical over the last two decades. A closer look at historical financial boom-bust cycles suggests that, in fact, pro-cyclicality in financial regulation is a common and recurring pattern. This paper introduces electoral concerns a model of financial intermediation to study how public opinion, financial innovation, and policy-makers incentives shape financial regulation. We show that politicians' electoral incentives can amplify small changes in voters' perceptions of financial innovation: when polarization is large, both over-regulation and under-regulation arise in equilibrium, and even small changes in public opinion can induce substantial regulatory shifts.

Keywords: Financial Regulation, Boom-Bust Cycles, Political Economy, Asymmetric and Private Information

JEL Classification: D72, D82, G18

Suggested Citation

Almasi, Pooya and Dagher, Jihad C. and Prato, Carlo, Regulatory Cycles: A Political Economy Model (March 7, 2018). Available at SSRN: https://ssrn.com/abstract=3136027 or http://dx.doi.org/10.2139/ssrn.3136027

Pooya Almasi

Georgetown University - Department of Economics ( email )

Washington, DC
United States

Jihad C. Dagher (Contact Author)

Milken Institute

1250 Fourth Street
Santa Monica, CA 90401
United States

Department of Economics | University of Southern California

Los Angeles, CA
United States

Goethe University | House of Finance ( email )

Theodor-W.-Adorno-Platz 3
60629 Frankfurt am Main
Germany

Carlo Prato

Columbia University - Department of Political Science ( email )

7th Floor, International Affairs Bldg.
420 W. 118th Street
New York, NY 10027
United States

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