Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Faculty & Research
  • Faculty
  • Research
  • Featured Topics
  • Academic Units
  • …→
  • Harvard Business School→
  • Faculty & Research→
Publications
Publications
  • June 2017
  • Article
  • Review of Financial Studies

The Political Economy of Financial Innovation: Evidence from Local Governments

By: Christophe Pérignon and Boris Vallée
  • Format:Print
ShareBar

Abstract

We examine the toxic loans sold by investment banks to local governments. Using proprietary data, we show that politicians strategically use these products to increase chances of being re-elected. Consistent with greater incentives to hide the cost of debt, toxic loans are utilized significantly more frequently within highly indebted local governments. Incumbent politicians from politically contested areas are also more likely to turn to toxic loans. Using a difference-in-differences methodology, we show that politicians time the election cycle by implementing more transactions immediately before an election rather than after. Politicians also exhibit herding behavior. Our findings demonstrate how financial innovation can foster strategic behaviors.

Keywords

Financial Innovation; Political Elections; Financing and Loans; Innovation and Invention

Citation

Pérignon, Christophe, and Boris Vallée. "The Political Economy of Financial Innovation: Evidence from Local Governments." Review of Financial Studies 30, no. 6 (June 2017): 1903–1934.
  • Find it at Harvard

About The Author

Boris Vallee

Finance
→More Publications

More from the Authors

    • April 2022
    • Faculty Research

    Big Blue: Starting a Real Estate Firm

    By: Boris Vallée and Sean Bracken
    • 2022
    • Faculty Research

    Fintech to the (Worker) Rescue: Earned Wage Access and Employee Retention

    By: Jose Murillo, Boris Vallee and Dolly Yu
    • October 2021 (Revised April 2022)
    • Faculty Research

    The Big Blue: Starting a Real Estate Firm

    By: Boris Vallee and Nikodem Szumilo
More from the Authors
  • Big Blue: Starting a Real Estate Firm By: Boris Vallée and Sean Bracken
  • Fintech to the (Worker) Rescue: Earned Wage Access and Employee Retention By: Jose Murillo, Boris Vallee and Dolly Yu
  • The Big Blue: Starting a Real Estate Firm By: Boris Vallee and Nikodem Szumilo
ǁ
Campus Map
Harvard Business School
Soldiers Field
Boston, MA 02163
→Map & Directions
→More Contact Information
  • Make a Gift
  • Site Map
  • Jobs
  • Harvard University
  • Trademarks
  • Policies
  • Accessibility
  • Digital Accessibility
Copyright © President & Fellows of Harvard College