Working Paper: CEPR ID: DP14409
Authors: Annelaure Delatte; Adrien Matray; Noemie Pinardontouati
Abstract: Formally independent private banks change their supply of credit to the corporate sector for the constituencies of contested political incumbents in order to improve their reelection prospects. In return, politicians grant such banks access to the profitable market for loans to local public entities among their constituencies. We examine French credit registry data for 2007-2017 and find that credit granted to the private sector increases by 9%-14% in the year during which a powerful incumbent faces a contested election. In line with politicians returning the favor, banks that grant more credit to private firms in election years gain market share in the local public entity debt market after the election is held. Thus we establish that, if politicians can control the allocation of rents, then formal independence does not ensure the private sector’s effective independence from politically motivated distortions.
Keywords: Politics and Banking; Moral Suasion; Local Government Financing
JEL Codes: G21; G30; H74; H81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Private banks increase their lending to firms in constituencies where a powerful incumbent faces a contested election (G21) | Credit to the private sector rises by 9.14% during the election year (H69) |
| Credit to the private sector rises by 9.14% during the election year (H69) | Banks gain market share in the local public entity debt market post-election (H74) |
| Private banks increase their lending to firms in constituencies where a powerful incumbent faces a contested election (G21) | Banks provide more credit to private firms during election years (G21) |
| Banks provide more credit to private firms during election years (G21) | Allocation is influenced by political considerations (D72) |
| Private banks increase their lending to firms in constituencies where a powerful incumbent faces a contested election (G21) | Targeting of credit expansion is directed towards firms in declining sectors (L52) |