Toxic Loans and the Entry of Extreme Candidates
53 Pages Posted: 9 Aug 2018
Date Written: July 6, 2018
Despite the importance of the 2008 financial crisis in explaining the growing trend of extreme and populist voting, the role played by public finance mismanagement has been so far neglected. In this paper, we study the electoral consequences of a public finance scandal: the leak on September 2011 of a list of French municipalities which contracted "toxic" loans to the bank Dexia. Using an instrumental variable strategy, we find that during the subsequent local elections in 2014, municipalities with toxic loans had a higher number of political parties and a higher share of extreme candidates. These effects were stronger in economically fragile municipalities and in cities with a higher growth of the immigrant population. The findings suggest that the revelation of public finance misconduct fosters the entry of extreme politicians, thus increasing their vote shares and decreasing the support for the incumbents' parties.
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