Political Allocation of Finance

Politicians in‡uence the allocation of …nance either directly via state banks, or indirectly via private banks using banking regulation or creditor rights. With state ownership of banks, entrepreneurs may form coalitions to bribe politicians to obtain scarce loans. With private ownership of banks, interest groups may lobby to in‡uence creditor rights to limit access to less established …rms. When public accountability and judicial independence are low, politicians prefer state ownership of banks. Politicians can extract more rents from competing coalitions when having direct control. The reason is that regulation only allows politicians to target certain types of entrepreneurs while direct control enables them to separate individual entrepreneurs. Beyond a certain threshold of public accountability and judicial independence legal risks from bribing become too high and it becomes politically optimal to to shift to lobbying on regulation by privatising banks. Access to …nance and entry increase with public accountability and tends to be greater under private ownership of banks. We also consider bribing to allow non-repayment of state bank loans, and discuss the intermediate case of private banks lending only to their owners. Contacting Author: Marcel Vorage University of Amsterdam, Roetersstraat 11, 1018 WB Amsterdam, The Netherlands tel.: +31 (0)20 525 5107 fax.: +31 (0)20 525 5285 e-mail: [email protected] [Acknowledgements] We would like to thank Ana Babus, Mario Bersem, Bruno Biais, Andrei Dubovik, Razvan Vlahu and seminar participants at the University of Amsterdam for useful suggestions.