Bank Influence at a Discount
CERETH Economics Working Paper Series 19/308
55 Pages Posted: 27 Jan 2019 Last revised: 18 Oct 2021
Date Written: November 24, 2020
In a general equilibrium framework, we study the cost incurred by banks to ``buy'' influence on capital regulation via campaign contributions. Our central result is that banks buy influence at a discount: They incur a cost that does not fully reflect the effect of lowering capital requirements. This allows banks to achieve abnormal returns. The larger the discount, the higher the abnormal returns, and the stronger the Tullock paradox (1972)---i.e., low contributions for high influence---appears in the context of banking. We proceed to identify how political and banking-specific factors affect the prominence of the paradox.
Keywords: campaign contributions, abnormal returns, capital requirements, general equilibrium
JEL Classification: D53, D72, G21, G28
Suggested Citation: Suggested Citation