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The interest group theory of financial development: Evidence from regulation

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  • Hauner, David
  • Prati, Alessandro
  • Bircan, Cagatay

Abstract

We use a new dataset of de jure measures of trade, capital account, product market, and domestic financial regulation for 91 countries from 1973 to 2005 to test Rajan and Zingales’s (2003) interest group theory of financial development. In line with the theory, we find strong evidence that trade liberalization is a leading indicator of domestic financial liberalization. This result is robust to the use of different data frequencies (annual, 5-year intervals), estimation methods (OLS, 2SLS, system GMM) and a check for non-linear effects. However, in contrast to the theory, we do not find consistent evidence of an effect of capital account liberalization.

Suggested Citation

  • Hauner, David & Prati, Alessandro & Bircan, Cagatay, 2013. "The interest group theory of financial development: Evidence from regulation," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 895-906.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:3:p:895-906
    DOI: 10.1016/j.jbankfin.2012.10.008
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    More about this item

    Keywords

    Financial development; Financial liberalization; Trade liberalization;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • G00 - Financial Economics - - General - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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