Working Paper: CEPR ID: DP11840
Authors: Manthos Delis; Iftekhar Hasan; Steven Ongena
Abstract: Does democratization reduce the cost of credit? Using global syndicated loan data from 1984 to 2014, we show that democratization has a sizeable negative effect on loan spreads: a one point increase in the zero-to-ten Polity IV index of democracy shaves on average 21 basis points off spreads. Reversals to autocracy hike spreads more strongly. Our results are robust to the comprehensive inclusion of relevant controls, to the instrumentation with regional waves of democratization, and to a battery of sensitivity tests. We thus highlight the lower cost of loans as one relevant mechanism through which democratization may affect economic development.
Keywords: loan pricing; loan spreads; democratic institutions; reversals
JEL Codes: G21; G30; P16; P26; P27; P47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Democratization (O17) | Lower cost of loans (G21) |
| Democratization (O17) | Reduction in loan spreads (G21) |
| Reversals to autocracy (D72) | Increase in loan spreads (G21) |
| Democratization (O17) | Reduction in loan spreads (G21) |