Free DP Download 14 February 2020 - PRIVATE CREDIT UNDER POLITICAL INFLUENCE: Evidence from France

Friday, February 14, 2020

Private Credit under Political Influence: Evidence from France
Anne-Laure Delatte, Adrien Matray, Noémie Pinardon-Touati            
CEPR DP No. 14409 | 09 February 2020

A new CEPR study by Anne-Laure Delatte, Adrien Matray, Noémie Pinardon-Touati provides evidence that—even with low levels of corruption, a limited need for (or possibility of) government bailouts, and full formal separation between politicians and bank-governing institutions—private banks may be motivated, by the possibility of future benefits, to distort their supply of credit to the local economy so as to curry favor with powerful politicians during election years.

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. The authors 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. The study shows 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.

Figure 2: Contested Constituencies of Powerful Politicians

The study was recently featured in an exclusive by LeMonde Newspaper: https://www.lemonde.fr/idees/article/2020/02/14/il-existe-en-france-un-mecanisme-d-echange-de-faveurs-entre-elus-locaux-et-banques_6029606_3232.html


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