The Political Economy of Collateral Externalities
SpeakerMagdalena Rola-Janicka (University of Amsterdam)
LocationTinbergen Institute Amsterdam, room 1.60
Date and time
March 05, 2019
12:00 - 13:00
This paper studies the impact of various political processes on prudential policies in a setting with pecuniary externalities. In the absence of a policy, borrowers do not internalize how their choice of debt affects prices and thus the tightness of future borrowing constraints. The resulting inefficiency can be resolved by a tax or cap on the initial debt. If some agents may benefit from purchasing the asset at a discount, the policy implemented by a politician is generally unable to restore constrained efficiency. If the politician can be influenced by lobbies, in equilibrium he is biased to benefit the wealthy, resulting in an excessively lax policy. If the politician is elected through majoritarian elections, the equilibrium policy varies with the distribution of wealth and ideological bias of the agents.