Political Corruption and Household Finance
48 Pages Posted: 22 Apr 2019
Date Written: March 28, 2019
We study the effect of political corruption on household financial well-being using microdata from the United States and China. Our identification strategy exploits recent anti-corruption campaigns in China as exogenous shocks to the perceived level of corruption held by individuals. Households respond to reduced corruption by increasing stock market participation, financial risk taking, and overall financial development. These results can be explained partially by the direct costs of corruption on household societal wealth, and predominantly by the non-pecuniary effect on households' trust and perceptions of institutional quality. Our findings suggest that political corruption largely impedes household financial development.
Keywords: Corruption, Household finance, Cultural finance, Trust, Political institutions
JEL Classification: D03, D14, G11, G02, D81, D73
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