Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-17T15:00:52.687Z Has data issue: false hasContentIssue false
  • English
  • Français

THE POLITICS OF FINANCIAL DEVELOPMENT AND CAPITAL ACCUMULATION

Published online by Cambridge University Press:  25 September 2017

Tarishi Matsuoka ,
Katsuyuki Naito  and
Keigo Nishida
Tarishi Matsuoka
Affiliation:
Tokyo Metropolitan University
Katsuyuki Naito
Affiliation:
Asia University
Keigo Nishida*
Affiliation:
Fukuoka University
*
Address correspondence to: Keigo Nishida, Faculty of Economics, Fukuoka University, 8-19-1, Nanakuma, Jonan-ku, Fukuoka, 814-0180, Japan; e-mail: knishida@fukuoka-u.ac.jp.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper considers the political economy of financial development in an overlapping generations model that incorporates credit market imperfections, and shows that income inequality is a determinant of financial and economic development. Individuals have an opportunity to start an investment project at a fixed cost, but their income to finance the cost is unequal. The government proposes a policy financed by taxation that mitigates credit market imperfections, the implementation of which is determined through majority voting. The policy benefits middle-income individuals who can start the investment only after the implementation of the policy. The policy is, however, against the interest of the rich who wish to block such new entry, and that of the poor who wish to avoid the tax burden. Whether the policy obtains majority support depends on income inequality. High income inequality makes the policy hard to implement, which causes financial and economic underdevelopment.

Keywords

Financial DevelopmentEconomic DevelopmentIncome InequalityMajority Voting
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 1 , January 2019 , pp. 358 - 383
Copyright
Copyright © Cambridge University Press 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We are grateful to Akihisa Shibata, Kazuhiro Yuki, Kazuo Mino, Kenn Ariga, and the seminar participants at Kyoto University for their helpful comments and suggestions. We are also grateful to an anonymous associate editor and two anonymous referees for their helpful suggestions. This work has received financial support from the Central Research Institute of Fukuoka University (No. 144002) and the Joint Research Program of KIER.

References

REFERENCES

Aghion, Philippe, Banerjee, Abhijit V., and Piketty, Thomas (1999) Dualism and macroeconomic volatility. Quarterly Journal of Economics 114, 1359–1397.Google Scholar
Aghion, Philippe and Bolton, Patrick (1997) A theory of trickle-down growth and development. Review of Economic Studies 64, 151–172.Google Scholar
Aghion, Philippe, Howitt, Peter, and Mayer-Foulkes, David (2005) The effect of financial development on convergence: Theory and evidence. Quarterly Journal of Economics 120, 173–222.Google Scholar
Alesina, Alberto and Rodrik, Dani (1994) Distributive politics and economic growth. Quarterly Journal of Economics 109, 465–490.Google Scholar
Antràs, Pol and Caballero, Ricardo J. (2009) Trade and capital flows: A financial frictions perspective. Journal of Political Economy 117, 701–744.Google Scholar
Antràs, Pol and Caballero, Ricardo J. (2010) On the role of financial frictions and the saving rate during trade liberalizations. Journal of the European Economic Association 8, 442–455.Google Scholar
Banerjee, Abhijit V. and Newman, Andrew F. (1993) Occupational choice and the process of development. Journal of Political Economy 101, 274–298.Google Scholar
Bebchuk, Lucian A. and Neeman, Zvika (2010) Investor protection and interest group politics. Review of Financial Studies 23, 1089–1119.Google Scholar
Bellettini, Giorgio and Ceroni, Carlotta Berti (2007) Income distribution, borrowing constraints and redistributive policies. European Economic Review 51, 625–645.Google Scholar
Bernanke, Ben and Gertler, Mark (1989) Agency costs, net worth, and business fluctuations. American Economic Review 79, 14–31.Google Scholar
Besley, Timothy and Persson, Torsten (2009) The origin of state capacity: Property rights, taxation, and politics. American Economic Review 99, 1218–1244.Google Scholar
Besley, Timothy and Persson, Torsten (2010) State capacity, conflict, and development. Econometrica 78, 1–34.Google Scholar
Bhattacharya, Joydeep (1998) Credit market imperfections, income distribution, and capital accumulation. Economic Theory 11, 171–200.Google Scholar
Bhattacharya, Joydeep, Qiao, Xue, and Wang, Min (2016) Endogenous borrowing constraints and wealth inequality. Macroeconomic Dynamics 20, 1413–1431.Google Scholar
Braun, Matias and Raddatz, Claudio (2008) The politics of financial development: Evidence from trade liberalization. Journal of Finance 63, 1469–1508.Google Scholar
Brett, Craig and Weymark, John A. (2017) Voting over selfishly optimal nonlinear income tax schedules. Games and Economic Behavior 101, 172–188.Google Scholar
Brown, Martin, Jappelli, Tullio, and Pagano, Marco (2009) Information sharing and credit: Firm-level evidence from transition countries. Journal of Financial Intermediation 18, 151–172.Google Scholar
Brown, Martin and Zehnder, Christian (2007) Credit reporting, relationship banking, and loan repayment. Journal of Money, Credit and Banking 39, 1883–1918.Google Scholar
Buera, Francisco J., Kaboski, Joseph P., and Shin, Yongseok (2011) Finance and development: A tale of two sectors. American Economic Review 101, 1964–2002.Google Scholar
Buera, Francisco J. and Shin, Yongseok (2013) Financial frictions and the persistence of history: A quantitative exploration. Journal of Political Economy 121, 221–272.Google Scholar
Caballé, Jordi, Jarque, Xavier, and Michetti, Elisabetta (2006) Chaotic dynamics in credit constrained emerging economies. Journal of Economic Dynamics and Control 30, 1261–1275.Google Scholar
Calderón, César and Liu, Lin (2003) The direction of causality between financial development and economic growth. Journal of Development Economics 72, 321–334.Google Scholar
Chakraborty, Shankha and Ray, Tridip (2006) Bank-based versus market-based financial systems: A growth-theoretic analysis. Journal of Monetary Economics 53, 329–350.Google Scholar
Chakraborty, Shankha and Ray, Tridip (2007) The development and structure of financial systems. Journal of Economic Dynamics and Control 31, 2920–2956.Google Scholar
Claessens, Stijn and Perotti, Enrico (2007) Finance and inequality: Channels and evidence. Journal of Comparative Economics 35, 748–773.Google Scholar
De Gregorio, José (1996) Borrowing constraints, human capital accumulation, and growth. Journal of Monetary Economics 37, 49–71.Google Scholar
de la Torre, Augusto, Gozzi, Juan Carlos, and Schmukler, Sergio L. (2007) Innovative Experiences in Access to Finance: Market Friendly Roles for the Visible Hand? Policy research working paper 4326. World Bank, Washington, DC.Google Scholar
Djankov, Simeon, McLiesh, Caralee, and Shleifer, Andrei (2007) Private credit in 129 countries. Journal of Financial Economics 84, 299–329.Google Scholar
Easterly, William (2001) The middle class consensus and economic development. Journal of Economic Growth 6, 317–335.Google Scholar
Easterly, William (2007) Inequality does cause underdevelopment: Insights from a new instrument. Journal of Development Economics 84, 755–776.Google Scholar
Galor, Oded and Zeira, Joseph (1993) Income distribution and macroeconomics. Review of Economic Studies 60, 35–52.Google Scholar
Haselmann, Rainer, Pistor, Katharina, and Vig, Vikrant (2010) How law affects lending. Review of Financial Studies 23, 549–580.Google Scholar
Jappelli, Tullio and Pagano, Marco (2002) Information sharing, lending and defaults: Cross-country evidence. Journal of Banking and Finance 26, 2017–2045.Google Scholar
Jappelli, Tullio, Pagano, Marco, and Bianco, Magda (2005) Courts and banks: Effects of judicial enforcement on credit markets. Journal of Money, Credit and Banking 37, 223–244.Google Scholar
Karlan, Dean and Zinman, Jonathan (2009) Observing unobservables: Identifying information asymmetries with a consumer field experiment. Econometrica 77, 1993–2008.Google Scholar
Kunieda, Takuma, Okada, Keisuke, and Shibata, Akihisa (2014) Finance and inequality: How does globalization change their relationship? Macroeconomic Dynamics 18, 1091–1128.Google Scholar
Laeven, Luc, Levine, Ross, and Michalopoulos, Stelios (2015) Financial innovation and endogenous growth. Journal of Financial Intermediation 24, 1–24.Google Scholar
La Porta, Rafael, Lopez-de-Silanes, Florencio, and Shleifer, Andrei (2002) Government ownership of banks. Journal of Finance 57, 265–301.Google Scholar
La Porta, Rafael, Lopez-de-Silanes, Florencio, Shleifer, Andrei, and Vishny, Robert W. (1997) Legal determinants of external finance. Journal of Finance 52, 1131–1150.Google Scholar
Levine, Ross (1998) The legal environment, banks, and long-run economic growth. Journal of Money, Credit and Banking 30, 596–613.Google Scholar
Levine, Ross (1999) Law, finance, and economic growth. Journal of Financial Intermediation 8, 8–35.Google Scholar
Levine, Ross (2005) Finance and growth: Theory and evidence. In Aghion, Philippe and Durlauf, Steven N. (eds.), Handbook of Economic Growth, vol. 1A, pp. 865–934. Amsterdam: North-Holland.Google Scholar
Matsuyama, Kiminori (2004) Financial market globalization, symmetry-breaking and endogenous inequality of nations. Econometrica 72, 853–884.Google Scholar
Moll, Benjamin (2014) Productivity losses from financial frictions: Can self-financing undo capital misallocation? American Economic Review 104, 3186–3221.Google Scholar
Padilla, A. Jorge and Pagano, Marco (1997) Endogenous communication among lenders and entrepreneurial incentives. Review of Financial Studies 10, 205–236.Google Scholar
Padilla, A. Jorge and Pagano, Marco (2000) Sharing default information as a borrower discipline device. European Economic Review 44, 1951–1980.Google Scholar
Pagano, Marco and Jappelli, Tullio (1993) Information sharing in credit markets. Journal of Finance 48, 1693–1718.Google Scholar
Pagano, Marco and Volpin, Paolo F. (2005) The political economy of corporate governance. American Economic Review 95, 1005–1030.Google Scholar
Perotti, Enrico and Volpin, Paolo (2004) Lobbying on Entry. CEPR discussion paper no. 4519.Google Scholar
Perotti, Roberto (1996) Growth, income distribution, and democracy: What the data say. Journal of Economic Growth 1, 149–187.Google Scholar
Persson, Torsten and Tabellini, Guido (1994) Is inequality harmful for growth? American Economic Review 84, 600–621.Google Scholar
Rajan, Raghuram G. and Ramcharan, Rodney (2011) Land and credit: A study of the political economy of banking in the United States in the early 20th century. Journal of Finance 66, 1895–1931.Google Scholar
Rajan, Raghuram G. and Zingales, Luigi (2003) The great reversal: The politics of financial development in the twentieth century. Journal of Financial Economics 69, 5–50.Google Scholar