Publications
Publications
- June 2017
- Review of Financial Studies
The Political Economy of Financial Innovation: Evidence from Local Governments
By: Christophe Pérignon and Boris Vallée
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
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.
About The Author
