When Do Special Interests Run Rampant? Disentangling the Role of Elections, Incomplete Information and Checks and Balances in Ba

Date Presented:

Nov 1, 1999


This paper investigates the political determinants of government decisions that benefit special interests, and specifically government decisions to deal with banking crises. I find that governments make smaller fiscal transfers to the financial sector and are less likely to exercise forbearance in dealing with insolvent financial institutions the more informed are voters, the closer are elections, and the larger the number of political veto players (conditional on the costs to voters of these policy decisions). The results suggest that policies that might be appropriate in the U.S. context for mitigating the magnitude of banking crises may be less efficacious in settings with other institutional arrangements.