The Political Economy of Financial Systems: Evidence from Suffrage Reforms in the Last Two Centuries
Initially, voting rights were limited to wealthy elites providing political support for stock markets. The franchise expansion induces the median voter to provide political support for banking development as this new electorate has lower financial holdings and benefits less from the uncertainty and financial returns from stock markets. Our panel data evidence covering 1830-1999 shows that tighter restrictions on the voting franchise induce a greater stock market development, whereas a broader voting franchise is more conducive towards the banking sector, consistent with Perotti and von Thadden (2006). Our results are robust to controlling for other political determinants and endogeneity.
Fundamental institutions drive financial development. Political institutions are together with legal institutions and cultural traits of first order importance (La Porta, Lopezde-Silanes, Shleifer, and Vishny, 1998; Rajan and Zingales, 2003; Guiso, Sapienza, and Zingales, 2004; Acemoglu and Robinson, 2005). This paper is the first to empirically study how an important political institution – the scope of the voting franchise – impacts on different forms of financial development (stock market and banking) through shifts in the distribution of preferences of the voting class.