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1 Muhammad Yunus, Banker to the Poor: The Autobiography of Muhammad Yunus, Founder of the Grameen Bank (London: Aurum Press, 1998), 46–48.
Return to text. 2 Ibid.
Return to text. 3 The description of the search fund relies on Professor Howard Stevenson, “Early Career LBOs Using the Search Fund Mode,” HBS case note 9–897–092. We thank Kevin Taweel and Jim Ellis for consenting to be interviewed for this book.
Return to text. 4 Center for Entrepreneurial Studies at Stanford University, Search Fund Study—2001, www.gsb.stanford/ces/search_funds_study_2001.html.
Return to text. 5 This is from David Eltis’s work, cited by Kenneth Sokoloff in “Institutions, Factor Endowments, and Paths of Development in the New World” (UCLA, working paper, 2000).
Return to text. 6 Adam Smith, The Wealth of Nations, Book 1, Chapter II, ed. Edwin Canan (1776; Chicago: University of Chicago Press, 1976), 278.
Return to text. 7 See Kathy He, Randall Morck, and Bernard Yeung, “Corporate Stability and Economic Growth” (New York University, working paper).
Return to text. 8 See Stanley Engerman and Kenneth Sokoloff, “Factor Endowments, Institutions, and Differential Paths of Growth among New World Economies: A View from Economic Historians of the United States,” NBER historical working paper no. 66, 1994.
Return to text. 9 See D. Acemoglu, S. Johnson, and J. Robinson, “The Colonial Origins of Comparative Development: An Empirical Study,” American Economic Review 91 (2001): 1369–1401, on the differences in the nature of European rule based on mortality rates.
Return to text. 10 For low education, see Kenneth Sokoloff and Stanley L. Engerman, “Institutions, Factors Endowment, and Paths of Development in the New World,” Journal of Economic Perspective 14 (2000): 217–232; for poor finance, see Stephen Haber, “Financial Markets and Industrial Development: A Comparative Study of Governmental Regulation, Financial Innovation, and Industrial Structure in Brazil and Mexico, 1840–1930,” in How Latin America Fell Behind, ed. Stephen Haber (Stanford, Calif.: Stanford University Press, 1997).
Return to text. 11 From Gabriel Kirkpatrick, “Rural Credit in North Carolina.” CUNA, www.cuna.org/dats/cu/research/irc/archive4_1.html.
Return to text. 12 See R. Kroszner and P. Strahan, “What Drives Deregulation? Economics and Politics of the Relaxation of Bank Branching Restrictions,” Quarterly Journal of Economics, November 1999: 1437–1467, and Jith Jayaratne and Philip Strahan, “Entry Restrictions, Industry Evolution, and Dynamic Efficiency: Evidence from Commercial Banking,” Journal of Law and Economics 41 (1998): 239–274.
Return to text. 13 Address on April 3, 1913, of Mr. Bryce, president of the International Congress of Historical Studies, cited in E. Powell, The Evolution of the Money Market (1385–1915): A Historical and Analytical Study of the Rise and Development of Finance as a Centralized Coordinated Force (London: The Financial News, 1915), 704.
DOES FINANCE BENEFIT ONLY THE RICH? 1 Tom Wolfe, The Bonfire of the Vanities (New York: Farrar, Straus and Giroux, 1987), 229. This passage is also cited in Daniel Fischel, Payback: The Conspiracy to Destroy Michael Milken and His Revolution (New York: Harper Business, 1995).
Return to text. 2 Cited in Louis D. Brandeis, Other People’s Money (Washington, DC: National Home Library Foundation, 1933), 1.
Return to text. 3 See J. Stiglitz and A. Weiss, “Credit Rationing in Markets with Imperfect Information,” American Economic Review 71 (1981): 393–410.
Return to text. 4 For work on collateral, see Yuk Shee Chan and Ajan V. Thakor, “Collateral and Competitive Equilibria with Moral Hazard and Private Information,” Journal of Finance 42 (1987): 345–364, and D. Besanko and A. Thakor, “Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets,” International Economic Review 28 (1987): 671–689.
Return to text. 5 It is important that Shylock hate the merchant, else he would not want to collect on the pound of flesh, and the threat to collect it would not be credible.
Return to text. 6 T. Jappelli, M. Pagano, and M. Bianco, “Courts and Banks: Effects of Judicial Enforcement of Credit Markets,” CEPR working paper no. 3347, April 2002. Similar studies include M. Chiuri and T. Jappelli, “Credit Market Imperfections and Home Ownership: A Comparative Study,” CEPR discussion paper no. 2717, 2001; D. Fabbri and Mario Padula, “Judicial Costs and Household Debt,” working paper, Center for Studies in Economics and Finance, University of Salerno, Italy, 2001; Lee Alston, “Farm Foreclosure Moratorium Legislation: A Lesson from the Past,” American Economic Review 74, no. 3 (1984): 445–458; and R. Gropp, J. Scholz, and M. White, “Personal Bankruptcy and Credit Supply and Demand,” Quarterly Journal of Economics 112 (1997): 217–251.
Return to text. 7 Gropp, Scholz, and White, “Personal Bankruptcy and Credit Supply and Demand,” 217–251.
Return to text. 8 Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (New York: Basic Books, 2000).
Return to text. 9 See, for example, M. Petersen and R. Rajan, “The Benefits of Lending Relationships: Evidence from Small Business Data,” Journal of Finance 49 (1994): 3–37.
Return to text. 10 Luigi Guiso and Luigi Zingales, “The Rise of Bank Relationships,” University of Chicago, working paper, 1999.
Return to text. 11 Naomi Lamoreaux, Insider Lending: Banks, Personal Connections and Economic Development in Industrial New England (Cambridge, U.K.: Cambridge University Press, 1994).
Return to text. 12 See R. G. Rajan, “Insiders and Outsiders: The Choice between Informed and Arm’s Length Debt,” Journal of Finance 47 (1992): 1367–1400.
Return to text. 13 Pujo Committee report, as cited in Brandeis, Other People’s Money, 31.
Return to text. 14 E. J. Hobsbawm, The Age of Capital, 1848–1885 (New York: New American Library, 1979), 242.
Return to text. 15 See Harris Corporation, Business History Review, “Founding Dates of the 1994 Fortune 500 U.S. Companies,” spring 1996, 69–90.
Return to text. 16 See J. Fear, “German Capitalism,” in Creating Modern Capitalism: How Entrepreneurs, Companies, and Countries Triumphed in Three Industrial Revolutions, ed. T. McCraw (Cambridge, Mass.: Harvard University Press, 1997), 181.
Return to text. 17 See R. W. Fogel, The Fourth Great Awakening and the Future of Egalitarianism (Chicago: University of Chicago Press, 2000), 112, and the references there.
Return to text. 18 T. McCraw, “American Capitalism,” in Creating Modern Capitalism, 320.
Return to text. 19 A. Chandler, Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, Mass.: Belknap Press, 1990), 18.
Return to text. 20 R. Chernow, Titan: The Life of John D. Rockefeller (New York: Random House, 1998), 226.
Return to text. 21 Chandler, Scale and Scope, 25.
Return to text. 22 Chernow, Titan, 288.
Return to text. 23 Chandler, Scale and Scope, 25.
Return to text. 24 Chernow, Titan, 265.
Return to text. 25 David Blau, “A Time Series Analysis of Self-Employment in the United States,” Journal of Political Economy 95, no. 3 (1987): 445–468.
Return to text. 26 For a model of this phenomenon, see R. Rajan and L. Zingales, “The Firm as a Dedicated Hierarchy: A Theory of the Origins and Growth of Firms,” Quarterly Journal of Economics 116 (2001): 805–852.
Return to text. 27 Chandler, Scale and Scope, 598.
Return to text. 28 See L. Stole and J. Zwiebel, “Organizational Design and Technology Choice under Intra-Firm Bargaining,” American Economic Review 86 (1996): 195–223, for a model of overstaffing by the owners to appropriate rents.
Return to text. 29 In short, the vertically integrated corporation used a number of sources of motivation. Internal competition and bureaucratization of routines kept workers from becoming too indispensable, while the possibility of promotion to more powerful positions kept them from becoming demotivated. See Rajan and Zingales, “The Firm as a Dedicated Hierarchy.”
Return to text. 30 Claudia Goldin and Lawrence Katz, “The Returns to Skill in the United States across the Twentieth Century,” NBER working paper 7126, 1999.
Return to text. 31 Dani Rodrik, “Democracies Pay Higher Wages,” NBER working paper 6364, 1998.
2: SHYLOCK TRANSFORMED 1 For the effects of liberalization on premiums, see Anusha Chari and Peter Henry, “Does Diversification Drive Stock Price Revaluation?” Stanford research paper no. 1677, 2001; for effects on investment, see Peter Henry, “Stock Market Liberalization, Economic Reform and Emerging Market Equity Price,” Journal of Finance 55 (2000): 529–564.
Return to text. 2 Technically, derivatives are contracts whose payoff is a function of (or is derived from) the value of another underlying security. A call option on Microsoft shares, for instance, gives the buyer the right, but not the obligation, to purchase Microsoft shares at a predetermined price (say, $50) within a prespecified period (say, three months). If, in three months, the Microsoft stock price is less than $50, then it is not worthwhile for the buyer to exercise the option. The option expires unused with the buyer receiving nothing. If the price is above $50, the buyer will exercise the option and essentially pocket the difference between the actual stock price that day and $50.
Return to text. 3 This description is largely based on Peter Tufano’s article “How Financial Engineering Can Advance Corporate Strategy,” Harvard Business Review 79 (1996), and on Donald Collat and Peter Tufano, “The Privatization of Rhone-Poulenc,” Harvard Business School Case 9–295–049.
Return to text. 4 Kenneth Froot, “The Market for Catastrophic Risk: A Clinical Examination,” NBER working paper 8110.
Return to text. 5 Data from Dun and Bradstreet Web site.
Return to text. 6 M. Petersen and R. Rajan, “Does Distance Still Matter? The Information Revolution in Small Business Lending,” Journal of Finance, forthcoming (2002).
Return to text. 7 Clayton Christensen, The Innovators’ Dilemma: When New Technologies Cause Great Firms to Fail (Boston: Harvard Business School Press, 1997).
Return to text. 8 A recent study of financial statements across 34 countries for the period 1985–1998 finds that U.S. accounting statements are, overall, most transparent. See Utpal Bhattacharya, Hazem Daouk, Michael Welker, “The World Price of Earnings Opacity,” Indiana University working paper, 2002.
Return to text. 9 M. Lang, K. Lins, and D. Miller, “ADRs, Analysts, and Accuracy: Does Cross Listing in the U.S. Improve a Firm’s Information Environment and Increase Market Value?” University of Utah, working paper, 2002.
Return to text. 10 R. Morck, B. Yeung, and W. Yu, “The Information Content of Stock Markets: Why Do Emerging Markets Have Synchronous Stock Price Movements?” Journal of Financial Economics 58 (2000): 215–260.
Return to text. 11 Jeffrey Wurgler, “Financial Markets and the Allocation of Capital,” Journal of Financial Economics 58 (2000): 187–214.
Return to text. 12 “Market Says No to UniCredito-Commerz. Alliance,” abstracted from II Corriere della Sera, in Italian, Corriere della Sera, September 4, 2001. “UniCredito Concerned over Share Price Fall,” Financial Times (London), September 10, 2001, 24.
Return to text. 13 “Borsa: UniCredito (+5.9%) strappa dopo rottura trattative Commerzbank,” AFX News Limited, September 11, 2001.
Return to text. 14 Mark L. Mitchell and Kenneth Lehn, “Do Bad Bidders Become Good Targets?” Journal of Political Economy 98 (1990): 372–398.
Return to text. 15 This is known as the Grossman-Stiglitz paradox. See Sanford Grossman and Joseph Stiglitz, “On the Impossibility of Informationally Efficient Markets,” American Economic Review 70, no. 3 (1980): 393.
Return to text. 16 B. Black, “Does Corporate Governance Matter? A Crude Test Using Russian Data,” Stanford Law School, working paper, 2000.
Return to text. 17 Ibid.
Return to text. 18 Alexander Dyck and Luigi Zingales, “Private Benefits of Control: An International Comparison,” NBER working paper no. 8711, 2002.
Return to text. 19 R. La Porta, F. Lopez-de-Silanes, and A. Shleifer, “Corporate Ownership around the World,” Journal of Finance 54, no. 2 (1999): 471–517, provide the first systematic cross-country evidence that institutional underdevelopment could lead to concentrated holdings.
Return to text. 20 The seminal work in this area is Rafael La Porta, Florencio Lopez de Silanes, Andrei Shleifer, and Robert W. Vishny, “Law and Finance,” Journal of Political Economy 106 (1998): 1113. For a correlation between private benefits and legal protection, see Dyck and Zingales, “Private Benefits of Control.”
Return to text. 21 Dyck and Zingales, “Private Benefits of Control.”
Return to text. 22 Leora Klapper and Inessa Love, “Corporate Governance, Investor Protection, and Performance in Emerging Markets,” World Bank, working paper, 2002.
Return to text. 23 Michael C. Jensen, “Agency Costs of Free Cash Flow, Corporate Finance and Takeovers,” American Economic Review 76 (1986): 323–339.
Return to text. 24 G. Zachary, “His Way,” Wall Street Journal, June 2, 1994.
Return to text. 25 The following draws heavily on G. Baker, “Beatrice: A Study in the Creation and Destruction of Value,” Journal of Finance 47, no. 3 (1992): 1081–1120.
Return to text. 26 Ibid., 1096.
Return to text. 27 O. J. Blanchard, F. Lopez-de-Silanes, and A. Shleifer, “What Do Firms Do with Cash Windfalls?” Journal of Financial Economics 36 (1994): 337–360.
Return to text. 28 Ibid., 358.
Return to text. 29 Ibid.
Return to text. 30 Darin Clay, “The Role of Institutional Investors” (University of Chicago, Ph.D. diss., 2001).
Return to text. 31 Ibid.
Return to text. 32 We have work in progress with Stewart Myers of MIT on this.
Return to text. 33 Steven Kaplan and Per Stromberg, “How Do Venture Capitalists Choose and Monitor Investments?” University of Chicago, working paper, 2000.
Return to text. 34 Josh Lerner, “Venture Capitalists and the Oversight of Private Firms,” Journal of Finance 50 (1995): 301–318.
Return to text. 35 Ibid.
Return to text. 36 Kaplan and Stromberg, “How Do Venture Capitalists Choose and Monitor Investments?”
Return to text. 37 M. Gorman and W. Sahlman, “What Do Venture Capitalists Do?” Journal of Business Venturing 4 (1989): 231–248.
3: THE FINANCIAL REVOLUTION AND INDIVIDUAL ECONOMIC FREEDOM 1 For year 1970, R. Rajan and L. Zingales, “The Great Reversals: The Politics of Financial Development in the 20th Century,” Journal of Financial Economics (forthcoming); and for year 2000, data are from Federation Internationale pour Bourse Valeurs.
Return to text. 2 For year 1970, Rajan and Zingales, “The Great Reversals”; and for year 2000, data are from Federation Internationale pour Bourse Valeurs.
Return to text. 3 Bank for International Settlements Quarterly Review, March 2002.
Return to text. 4 Council of Economic Advisers, Economic Report of the President (Washington, DC: U.S. Government Printing Office, February 2002), 412.
Return to text. 5 Ibid., 261.
Return to text. 6 Louis D. Brandeis, letter to Robert W. Bruere, Columbia Law Review 31 (1922): 7.
Return to text. 7 Louis D. Brandeis, Other People’s Money (Washington, DC: National Home Library Foundation, 1933), 62.
Return to text. 8 Joel Seligman, The Transformation of Wall Street (Boston: Northeastern University Press, 1995), 42.
Return to text. 9 For the evidence that it was politically, not economically, motivated, see George Benston, The Separation of Commercial and Investment Banking (Oxford: Oxford University Press, 1990), and Randall Kroszner and Raghuram G. Rajan, “Is the Glass Steagall Act Justified?: Evidence from the U.S. Experience with Universal Banking, 1921–1933,” American Economic Review 84 (1994): 810–832.
Return to text. 10 The venture capital data are from J. Lerner, Venture Capital and Private Equity: A Casebook (New York: Wiley, 2000). According to the International Monetary Fund (International Financial Statistics), Italian gross fixed capital formation in 1997 was L 324.9 trillion, equal to $184 billion at the exchange rate at the time.
Return to text. 11 PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree Survey. Www.pwcglobal.com/cy/eng/about/press-rm/PressRel Current/Money_Tree.html.
Return to text. 12 See Fischel, Payback: The Conspiracy to Destroy Michael Milken, 24.
Return to text. 13 From 1977 to 1986, data are from B. Holmstrom and S. Kaplan, “Corporate Governance and Merger Activity in the U.S.: Making Sense of the 1980s and the 1990s,” Journal of Economic Literature 15, no. 2 (2001), 121–144.
Return to text. 14 Christian Science Monitor, “Time Might Be Right for a Hunk of Junk,” February 11, 2002.
Return to text. 15 Typically, a large order obtains unfavorable prices. Specialists have to hold it for a while before being able to unload it on others. They may also fear that the large trader knows something they do not. They demand compensation for the risk through a lower price.
Return to text. 16 For a detailed description of the effects of the elimination of fixed commissions, see M. Blume, J. Siegel, and D. Rottenberg, The Revolution on Wall Street: The Rise and Decline of the New York Stock Exchange (New York: Norton, 1993).
Return to text. 17 P. Gompers and A. Metrick, “Institutional Investors and Equity Prices,” Quarterly Journal of Economics 116, no. 1 (2001): 229–260; J. Poterba and A. Samwick, “Stock Ownership Patterns, Stock Market Fluctuations, and Consumption,” Brookings Paper on Economic Activity 2 (1985): 295–357; and Statistical Abstract of the United States, 2001, Washington, DC: U.S. Bureau of the Census (2001): 739.
Return to text. 18 Statistical Abstract of the United States, 2001, table 1214.
Return to text. 19 Holmstrom and Kaplan, “Corporate Governance and Merger Activity in the U.S.”
Return to text. 20 James M. Poterba, “The Rate of Return to Corporate Capital and Factor Shares: New Estimates Using Revised National Income Accounts and Capital Stock Data,” NBER working paper no. W6263, 1999.
Return to text. 21 William Shepherd, “Causes of Increased Competition in the U.S. Economy, 1939–1980,” Review of Economics and Statistics 64, issue 4 (1982): 613–626, cited in David Audretsch and A. Roy Thurik, “What’s New about the New Economy? Sources of Growth in the Managed and Entrepreneurial Economies,” discussion paper 44, ERIM, 2000.
Return to text. 22 Economic Report of the President (1998, 2001).
Return to text. 23 Audretsch and Thurik, “What’s New about the New Economy?”
Return to text. 24 G. Dosi, “Sources, Procedures and Microeconomic Effects of Innovation,” Journal of Economic Literature 26 (1988): 1120–1171; and Frederic Pryor, “Will Most of Us Be Working for Giant Enterprises by 2028?” Journal of Economic Behavior and Organization 44, no. 4 (2000): 363–382.
Return to text. 25 See, for example, B. Carlsson, The Rise of Small Business: Causes and Consequences, cited in W. J. Adams, ed., Singular Europe: Economy and Policy of the European Community after 1992 (Ann Arbor: University of Michigan Press, 1992), 145–169.
Return to text. 26 Erik Bynjolfson, Thomas W. Malone, Vijay Gurbaxani, and Ajit Kambil, eds., The Impact of the Modern Corporation (New York: Columbia University Press, 1994); and Nicholas Komninos, The Effect of Information Technology on Average Firm Size and the Degree of Vertical Integration in the Manufacturing Sector (American University, Ph.D. diss., 1994).
Return to text. 27 The rest of this subsection relies heavily for quotes and facts on “The Record Industry Takes Fright,” Economist, January 29, 2000, 69.
Return to text. 28 Ibid.
Return to text. 29 Ibid.
Return to text. 30 Statistical Abstract of the United States, 2001, 377. The data are the number of jobs held between the ages of eighteen and thirty-four, measured over the period 1978 to 1998.
Return to text. 31 David Jaeger and Ann Stevens, “Is Job Stability in the United States Falling? Reconciling Trends in the Current Population Survey and Panel Study of Income Dynamics,” NBER working paper no. 6650, 1998. Some of this instability may be due to the removal of layers of middle management in the corporate restructurings that took place in the 1980s and 1990s.
Return to text. 32 For a model, see R. Rajan and L. Zingales, “The Firm as a Dedicated Hierarchy: A Theory of the Origins and Growth of Firms,” Quarterly Journal of Economics 116 (2001): 805–852.
Return to text. 33 Tim Jackson, Inside Intel: Andy Grove and the Rise of the World’s Most Powerful Chip Company (New York: Penguin Group, 1997).
Return to text. 34 Amar V. Bhide, Origin and Evolution of New Business (New York: Oxford University Press, 2000), 94.
Return to text. 35 Martin Caree, Andre van Stel, Roy Thurik, and Sander Wennekers, “Economic Development and Business Ownership: An Analysis Using Data of 23 OECD Countries in the Period 1976–1996,” Small Business Economics, June 2000; David M. Blau, “A Time-Series Analysis of Self-Employment in the United States,” Journal of Political Economy 95, no. 3 (1987): 445–467; and D. B. Audretsch, M. A. Carree, A. J. van Stel, and A. R. Thurik, “Impeded Industrial Restructuring: The Growth Penalty,” Institute for Development Strategies, research paper, October 2000.
Return to text. 36 B. Carlsson, “The Evolution of Manufacturing Technology and Its Impact on Industrial Structure: An International Study,” Small Business Economics 1 (1989): 21–37; and B. Carlsson, “Small Business, Entrepreneurship, and Industrial Dynamics,” in Are Small Firms Important? Their Role and Impact, ed. Z. Acs (Dordrecht, Netherlands: Kluwer Academic Publishers, 1999), 99–110.
Return to text. 37 General Motors annual reports.
Return to text. 38 Rebecca Blumenstein and Fara Warner, “GM Seeks to Make Delphi Unit Independent,” Wall Street Journal, August 4, 1998.
Return to text. 39 These facts are from S. Davis and J. Haltiwanger, “The Distribution of Employees by Establishment Size: Patterns of Change and Comovement in the United States, 1962–85” (University of Chicago, 1989, mimeo). An establishment does not correspond to a firm, but it would be surprising if the trends were grossly different.
Return to text. 40 Pryor, “Will Most of Us Be Working for Giant Enterprises by 2028?”
Return to text. 41 This question was first posed by Armen Alchian and Harold Demsetz, “Production, Information Costs and Economic Organization,” American Economic Review 62 (1972): 777–795.
Return to text. 42 Early antecedents of critical resource theory come from the focus of sociologists like Richard Emerson, “Power Dependence Relations,” American Sociological Review 27 (1963): 31–41, on the sources of power. Management theorists like Birger Wernerfelt, “A Resource Based View of the Firm,” Strategic Management Journal 5 (1984): 171–180, and G. Hamel and C. Pralahad, “The Core Competence of the Corporation,” Harvard Business Review 68 (1990): 79–91, have developed on this theme focusing on the firm’s competencies as being the critical resource. The seminal work in economics is S. Grossman and O. Hart, “The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration,” Journal of Political Economy 94 (1986): 691–719, who focus on property rights as a source of power but also address the fundamental question of why power can be noncontractual. Since then, the theory has moved away from Grossman and Hart’s focus on property rights as the sole critical resource to other resources (see R. Rajan and L. Zingales, “Power in a Theory of the Firm,” Quarterly Journal of Economics 112 [1998]: 387–432, or Bengt Holmstrom, “The Firm as a Subeconomy,” Journal of Law, Economics, and Organization 15 [1999]: 74–102).
Return to text. 43 The data in this paragraph are from Statistical Abstract of the United States, 2001, table 593.
Return to text. 44 See Rebecca Demsetz, “Human Resources Needs in the Evolving Financial Sector,” Current Issues, Federal Reserve Bank of New York, vol. 3, no. 13, November 1997.
Return to text. 45 See Larry Hunter, Annette Bernhardt, Katherine Hughes, Eva Skuratowicz, “It’s Not Just the ATMs: Technology, Firm Strategies, Jobs, and Earnings in Retail Banking,” Wharton Financial Institutions Center, working paper, 2000.
Return to text. 46 We thank Mark Knez for this example.
Return to text. 47 L. Katz and K. Murphy, “Changes in Relative Wages, 1963–1987: Supply and Demand Factors,” Quarterly Journal of Economics 107 (February 1992): 33–78.
Return to text. 48 Paul Beaudry and David Green, “Changes in U.S. Wages 1976–2000: Ongoing Skill Bias or Major Technological Change?” NBER working paper no. 8787. One puzzle is that if human capital is becoming more important, why have the factor shares of capital and labor remained relatively constant through much of the century (Thomas Piketty and Emmanuel Saez, “Income Inequality in the United States, 1913–1998,” NBER working paper no. w8467, 2001). A possible explanation is that work is more capital-intensive, reflecting in part the greater availability of capital. Another possible piece of the explanation is that labor is now partly compensated through options.
Return to text. 49 For the organizational problems in dealing with soft information, see Jeremy Stein, “Information Production and Capital Allocation: Decentralized vs. Hierarchical Firms,” Journal of Finance, October 2002; and A. Berger, N. Miller, M. Petersen, R. Rajan, and J. Stein, “Does Function Follow Organizational Form? Evidence from the Lending Practices of Large and Small Banks,” NBER working paper w8752, 2002. For the elimination of middle management positions in banks, see Hunter et al., “It’s Not Just the ATMs.” For the elimination of such positions in industrial firms, the flattening of their organizational structure, and decentralization see R. Rajan and J. Wulf, “The Flattening Firm,” University of Chicago, working paper, 2002.
Return to text. 50 See “John Meriwether by the Numbers,” Institutional Investor, November 1996, 62.
Return to text. 51 “John Meriwether by the Numbers” reports a conversation between Derek Maughan, the CEO of Salomon, and Gerald Rosenfeld, from Lazard Freres. Maughan asked Rosenfeld what his worst nightmare for Salomon was. “That the arb people would all leave now that Meriwether wasn’t coming back,” Rosenfeld said. According to Rosenfeld, Maughan shot back: “No way. Those guys are all tied to Salomon.”
Return to text. 52 John Gutfreund, Meriwether’s boss at Salomon at the time of the crisis, used to walk the trading floors. But his successors were more distant.
Return to text. 53 Economist, April 8, 2000, 76.
Return to text. 54 See C. Prendergast, “The Provision of Incentives in Firms,” Journal of Economic Literature 37, no. 1 (March 1999): 7–63.
Return to text. 55 Piketty and Saez, “Income Inequality in the United States, 1913–1998.”
Return to text. 56 Robert Fogel, The Fourth Great Awakening and the Future of Egalitarianism (London: University of Chicago Press, 2000), 219.
4: THE DARK SIDE OF FINANCE 1 International Financial Risk Institute, “Not Just One Man—Barings,” http://newrisk.ifci.ch/137550.htm.
Return to text. 2 For a model of this, see Douglas Diamond and Raghuram Rajan, “Liquidity Risk, Liquidity Creation and Financial Fragility: A Theory of Banking,” Journal of Political Economy 109 (2001): 287–327.
Return to text. 3 For a model, see S. Myers and R. Rajan, “The Paradox of Liquidity,” Quarterly Journal of Economics 113, no. 3 (August 1998).
Return to text. 4 One way to define market efficiency is that prices equal fundamental value. The second way is that it is very hard to earn excess risk-adjusted returns. For classic discussions, see Eugene Fama, “Risk, Return, and Equilibrium,” Journal of Political Economy 78, no. 1 (February 1971): 289–298; and Eugene Fama, “Efficient Capital Markets II,” Journal of Finance 46, no. 5 (December 1991): 1575–1617.
Return to text. 5 L. Roshental and C. Young, “The Seemingly Anomalous Price Behavior of Royal Dutch Shell and Unilever nv/plc,” Journal of Financial Economics 26 (1990): 123–141. K. Froot and E. Debora, “How Are Stock Prices Affected by the Location of Trade?” Journal of Financial Economics 53 (1999): 189–216.
Return to text. 6 We base our account on O. Lamont and R. Thaler, “Can the Market Add and Subtract? Mispricing in Tech-Stock Carve-outs,” working paper, University of Chicago, 2000. See also Brad Cornell and Qiao Liu, “The Parent Company Puzzle: When Is the Whole Worth Less Than One of the Parts?” Journal of Corporate Finance 7, no. 6 (2000): 341–366; Michael Schill and Chunsheng Zhou, “Pricing an Emerging Industry: Evidence from Internet Subsidiary Carve-guts,” and Mark Mitchell, Todd Pulvino, and Erik Stafford, “Limited Arbitrage in Equity Markets,” Journal of Finance 32, no. 2 (February 2002). For an accessible and prescient history of the Internet boom, see Michael J. Mandel, The Coming Internet Depression: Why the High-Tech Boom Will Go Bust, Why the Crash Will Be Worse Than You Think, and How to Prosper Afterward (New York: Basic Books, 2000).
Return to text. 7 Another pertinent question is “Why are you telling us?,” a question that should be asked of all those who peddle books with titles like How to Make a Million on the Stock Market in Your Sleep.
Return to text. 8 Michael C. Jensen, “Some Anomalous Evidence Regarding Market Efficiency,” Journal of Financial Economics 6 (1978): 95–101.
Return to text. 9 See L. Summers, “Does the Stock Market Rationally Reflect Fundamental Values?” Journal of Finance 41, issue 3 (1986): 591–600, for a criticism of tests of efficient markets. For a wonderful book on market irrationality, see Robert Shiller, Irrational Exuberance (New York: Broadway Books, 2001).
Return to text. 10 The seminal article here is A. Shleifer and R. Vishny, “The Limits to Arbitrage,” Journal of Finance 52, no. 1(1997), 35–56.
Return to text. 11 See Carol Loomis, “A House Built on Sand,” Fortune Magazine, October 26, 1998, and David Shirreff, “Five Days That Shook the World,” Euromoney (November 10, 1998), for the figures that are cited in the next few paragraphs.
Return to text. 12 Eli Ofek and Matthew Richardson, “DotCom Mania: A Survey of Market Efficiency in the Internet Sector,” working paper, New York University, 2001.
Return to text. 13 Justin Baer, “Buyback, Palm Distribution Boost 3Com Shares,” Chicago Sun Times, May 9, 2000.
Return to text. 14 Ofek and Richardson, “DotCom Mania.”
Return to text. 15 The other reason why the arbitrage might not have been feasible is that to implement it, investors had to borrow Palm shares and sell them. Since 3Com floated only 5 percent of Palm shares, only a few shares were physically available, and most of them were held by individual investors, who generally do not lend them. Hence, borrowing Palm shares became extremely costly, if not outright impossible.
Return to text. 16 Lamont and Thaler, “Can the Market Add and Subtract?,” 27.
Return to text. 17 See, for example, Merton Miller’s presidential address to the American Finance Association (Merton Miller, “Debt and Taxes,” Journal of Finance 32 (1977): 261–275).
Return to text. 18 Ofek and Richardson, “DotCom Mania.”
Return to text. 19 In a study one of us did, we found that the extent of analysts’ following an initial public offering increases the initial returns experienced by investors (Raghuram Rajan and Henri Servaes, “Analyst Following of Initial Public Offerings,” Journal of Finance 52 [1997]: 507–529).
Return to text. 20 Ofek and Richardson, “DotCom Mania.”
Return to text. 21 See Barbara Donnelly and Michael Sesit, “U.S. Bears Bets May Roil Japan’s Turmoil,” Wall Street Journal, April 17, 1990. More generally, the introduction of options on a stock reduces the stock market price by 5 percent (see Sorin Sorescu, “The Effect of Options on Stock Prices: 1973 to 1995,” Journal of Finance 55 (2000): 487–514).
Return to text. 22 Cited in R. Wermers, “Mutual Fund Herding and the Impact on Stock Prices,” Journal of Finance 54, no. 2 (1999): 584.
Return to text. 23 See Judy Chevalier and Glenn Ellison, “Risk Taking by Mutual Funds as a Response to Incentives,” Journal of Political Economy 105, no. 6 (December 1997): 1167–1200, for evidence.
Return to text. 24 Randall Morck, Andrei Shleifer, and Robert Vishny, “The Stock Market and Investment: Is the Market a Sideshow?” Brookings Papers on Economic Activity 2 (1990): 157–202.
Return to text. 25 Oliver Blanchard, Changyong Rhee, and Lawrence Summers, “The Stock Market, Profit, and Investments,” Quarterly Journal of Economics 108 (1990): 115–137.
Return to text. 26 Ibid.
Return to text. 27 James Poterba, comments to “The Stock Market and Investment: Is the Market a Sideshow?” Brookings Papers on Economic Activity 2 (1990): 208–213.
Return to text. 28 From www.globalfindata.com.
Return to text. 29 Total nonresidential investments from the Council of Economic Advisers, Economic Report of the President, 2002, 342. The 2002 number is estimated on the basis of the first three quarters.
Return to text. 30 Nicholas George, “Sonera Abandons 3G Plans and Returns License,” Financial Times, August 10, 2001.
Return to text. 31 Dan Roberts, “Glorious Hopes on a Trillion-Dollar Scrapheap,” Financial Times, September 5, 2001.
Return to text. 32 $809 billion in syndicated loans, $415 billion in the bond market, and $500 billion in the private equity and stock market issues. See Roberts, “Glorious Hopes.”
Return to text. 33 G. Kaminsky and C. Reinhart, “The Twin Crises: The Causes of Banking and Balance of Payments Problems,” American Economic Review 89 (1999): 473–500.
5: THE BOTTOM LINE ON FINANCIAL DEVELOPMENT 1 Kenneth Sokoloff and Stanley L. Engerman, “Institutions, Factor Endowments and Paths of Development in the New World,” Journal of Economic Perspectives 3 (2000): 217–232.
Return to text. 2 After studying data from thirty-five countries between 1860 and 1963, the economist Raymond Goldsmith concluded, using very careful language, that “a rough parallelism can be observed between economic and financial development if periods of several decades are considered” and “there are even indications in the few countries for which data are available that periods of more rapid economic growth have been accompanied, though not without exception, by an above-average rate of financial development.” Raymond Goldsmith, Financial Structure and Development (New Haven, Conn.: Yale University Press, 1969), 48.
Return to text. 3 Or as the Cambridge University economist Joan Robinson once put it, “Where enterprise leads, finance follows.”
Return to text. 4 R. King and R. Levine, “Finance and Growth: Schumpeter Might Be Right,” Quarterly Journal of Economics 108 (1993): 734.
Return to text. 5 Ibid.
Return to text. 6 R. Rajan and L. Zingales, “Financial Dependence and Growth,” American Economic Review 88, no. 3 (1998): 559–586.
Return to text. 7 J. Jayaratne and P. Strahan, “Entry Restictions, Industry Evolution and Dynamic Efficiency: Evidence from Commercial Banking,” Journal of Law and Economics 41, no. 1 (1998): 239–273.
Return to text. 8 See S. Black and P. Strahan, “The Division of Spoils: Rent-Sharing and Discrimination in a Regulated Industry,” American Economic Review 91, no. 4 (2001): 814–831.
Return to text. 9 J. Jayaratne and P. Strahan, “The Finance-Growth Nexus: Evidence from Bank Branch Deregulation,” Quarterly Journal of Economics 111 (1996): 639–670.
Return to text. 10 However, there is still a concern. An assumption underlying our example is that the tracks are not changed in anticipation of the train’s coming. States may have deregulated their banking systems anticipating greater economic growth and hence a greater need for financing. If so, deregulation may simply precede, but not actually cause, growth. Fortunately, we can exclude this possibility. If states deregulated anticipating growth in financing needs, the volume of bank lending should have exploded after deregulation. It did not! Instead, deregulation led to better credit evaluation and thus improved resource allocation by banks. It is the improvement in the quality of loans the banks made that led to fewer loan losses and more growth.
Return to text. 11 Campbell Harvey and Christian Lundblad, “Does Financial Liberalization Spur Growth?” NBER working paper no. 8245, 2001.
Return to text. 12 Sandra Black and Philip Strahan, “Entrepreneurship and Bank Credit Availability” (MIT, March 2001, mimeo).
Return to text. 13 Rajan and Zingales, “Financial Dependence and Growth.”
Return to text. 14 See L. Guiso, Paola Sapienza, and Luigi Zingales, “Does Local Financial Development Matter?” NBER working paper no. 8923, 2002.
Return to text. 15 Much of what follows draws on the work of Stephen Haber, an economic historian at Stanford University.
Return to text. 16 Carlos Marichal in How Latin America Fell Behind: Essays in the Economic Histories of Brazil and Mexico, 1800–1914, ed. Stephen Haber (Stanford, Calif.: Stanford University Press, 1997), 122.
Return to text. 17 Ibid.
Return to text. 18 Ibid., 122–123.
Return to text. 19 Haber, How Latin America Fell Behind, 157.
Return to text. 20 Ibid.
Return to text. 21 Ibid., 159.
Return to text. 22 Stephen Haber, “Industrial Concentration and the Capital Markets: A Comparative Study of Brazil, Mexico, and the United States,” Journal of Economic History 51, no. 3 (1991), 559–580.
Return to text. 23 Haber, How Latin America Fell Behind, 159.
Return to text. 24 Ibid.
Return to text. 25 Ibid., 151.
Return to text. 26 Ibid., 152.
Return to text. 27 Ibid., 153.
Return to text. 28 Ibid., 156.
Return to text. 29 Ibid., 153.
Return to text. 30 Ibid., 162–163.
Return to text. 31 Ibid.
Return to text. 32 Haber, “Industrial Concentration and the Capital Markets,” 562.
Return to text. 33 Ibid., 574.
Return to text. 34 The next few paragraphs draw from Jim Levinsohn and Wendy Petropoulos, NBER working paper no. 8348, 2001.
Return to text. 35 This effect is present even controlling for other regional differences in the economic conditions. See L. Guiso, Paola Sapienza, and Luigi Zingales, “Does Local Financial Development Matter?” NBER working paper no. 8923, 2002.
Return to text. 36 The pattern persists after we account for the influence of a country’s per capita GDP and its recent growth rate. One obvious explanation is that billionaires are more likely to own publicly traded firms, and their stock prices tend to be high when the country’s equity markets are high. Those who inherit wealth, however, also tend to own stock—the heirs of Sam Walton, the Fords, and the Siemens come to mind—but the relation between frequency of inherited billionaires per million people and stock market capitalization is much weaker. More important, the relationship exists even if we measure financial development in a way that is not directly affected by the level of stock market valuations—such as the number of listed firms per million of population. Countries with better accounting standards also have more self-made billionaires.
Return to text. 37 Randall Morck, David Strangeland, and Bernard Yeung, “Inherited Wealth, Corporate Control, and Economic Growth: The Canadian Disease?” in Concentrated Capital Ownership, ed. R. K. Morck (Chicago: University of Chicago Press, 2000).
Return to text. 38 Ibid.
Return to text. 39 Francisco Perez-Gonzalez, “Does Inherited Control Hurt Performance?” Columbia University, working paper, 2002.
Return to text. 40 Joseph A. Schumpeter, The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle (New Brunswick, London: Transaction Publishers, 1993), 96.
Return to text. 41 See Asli Demirguc-Kunt and Enrica Detragiache, “Financial Liberalization and Financial Fragility,” Proceedings of the Annual World Bank Conference on Development Economics, 1998.
Return to text. 42 Ibid., Demirguc-Kunt and Detragiache show that countries that are financially restrained have higher growth even after suffering a banking crisis.
6: THE TAMING OF THE GOVERNMENT 1 This chapter has benefited tremendously from comments by Candice Prendergast. It is partly based on work with Abhijit Banerjee.
Return to text. 2 See D. North and B. Weingast, “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England,” Journal of Economic History 49, no. 4 (1989): 803–832.
Return to text. 3 This is reminiscent of Gary Becker’s argument (Gary Becker, “A Theory of Competition among Pressure Groups for Political Influence,” Quarterly Journal of Finance 98, no. 3 [1983]: 371–400) that economically inefficient policies tend to lose out when in competition with more efficient policies. Our point is that economically efficient owners will be better able to command power than inefficient ones, provided they can come to the fore. Through much of the feudal period, they were not able to do so because of their lack of organization, the suppression of markets, and the primacy of coercive power. It is also related to the idea in S. Myers and R. Rajan, “The Paradox of Liquidity,” that illiquid assets are particularly hard to expropriate.
Return to text. 4 Jack Weatherford, The History of Money: From Sandstone to Cyberspace (New York: Crown, 1997), 65.
Return to text. 5 Malcolm Barber, The New Knighthood: A History of the Order of the Temple (London: Cambridge University Press, 1994), 268.
Return to text. 6 Ibid., 266.
Return to text. 7 Ibid., 270.
Return to text. 8 See Barbara Tuchman, A Distant Mirror: The Calamitous 14th Century (New York: Ballantine Books, 1979), 42–44, and Weatherford, History of Money, 69.
Return to text. 9 Barber, New Knighthood, 298.
Return to text. 10 Richard Pipes, Property and Freedom (New York: Knopf, 1999), 17–18.
Return to text. 11 See North and Weingast, “Constitutions and Commitment.”
Return to text. 12 Henry Hallam, Constitutional History of England (New York: Harper and Brothers, 1876), 26.
Return to text. 13 Bruce Carruthers, City of Capital: Politics and Markets in the English Financial Revolution (Princeton, N. J.: Princeton University Press, 1996), 122.
Return to text. 14 North and Weingast, “Constitutions and Commitment,” 822–824.
Return to text. 15 See North and Weingast, “Constitutions and Commitment.”
Return to text. 16 See Carruthers, City of Capital, 122, for a development of this argument.
Return to text. 17 S. E. Finer, The History of Government, vol. 3 (London: Oxford Press, 1997), 1271.
Return to text. 18 See H. Pirenne, Economic and Social History of Mediaeval Europe (New York: Harcourt, Brace and World, 1937), 63.
Return to text. 19 Lawrence Stone, Crisis of the Aristocracy (Oxford: Clarendon Press, 1956), 97.
Return to text. 20 C. G. A. Clay, Economic Expansion and Social Change: England, 1500–1700 (Cambridge, U.K.: Cambridge University Press, 1984), 70.
Return to text. 21 Ibid., 83.
Return to text. 22 For the greater readiness to use new knowledge by the gentry, see, for example, H. J. Habakkuk, “The Market for Monastic Property, 1539–1603,” Economic History Review 10, no. 3 (1987): 362–380, and Clay, Economic Expansion and Social Change. The passage is from R. H. Tawney, “The Rise of the Gentry, 1558–1640,” Economic History Review 11 (1949): 16.
Return to text. 23 G. G. Coulton, The Mediaeval Village (Cambridge, U.K.: Cambridge University Press, 1925), 13.
Return to text. 24 Ibid., 39.
Return to text. 25 Stone, Crisis of the Aristocracy, 121.
Return to text. 26 Finer, History of Government, 1338.
Return to text. 27 Many of these historians drew from the investigations of Arthur Young. See the references in Robert Allen, Enclosure and the Yeoman: The Agricultural Development of the South Midlands, 1450–1850 (Oxford: Clarendon Press, 1992), for a list of his works.
Return to text. 28 See Allen, Enclosure and the Yeoman, for a cogent analysis.
Return to text. 29 See Gregory Clark, “Yields per Acre in English Agriculture, 1250–1860: Evidence from Labor Inputs,” Economic History Review 44 (1991): 445–460, for a time path of productivity increases, and Allen, Enclosure and the Yeoman, for the controversies surrounding it.
Return to text. 30 Tawney, “Rise of the Gentry,” 75.
Return to text. 31 Hallam, Constitutional History of England, 55.
Return to text. 32 Ibid.
Return to text. 33 See, for example, Hallam, Constitutional History of England, 36–37.
Return to text. 34 Hallam, Constitutional History of England, 35, 38.
Return to text. 35 Ibid., 151.
Return to text. 36 Hallam, Constitutional History of England.
Return to text. 37 Pipes, Property and Freedom, 33.
Return to text. 38 We are being very imprecise about what part of the landed gentry opposed the monarchy. Certainly, the opposition to Charles I was concentrated among the lower gentry. But it also included elements of the nobility and the upper gentry.
Return to text. 39 G. Negley and J. Patrick, The Quest for Utopia: An Anthology of Imaginary Societies (New York: Henry Schuman, 1952), 383.
Return to text. 40 Allen, Enclosure and the Yeoman, 305–306.
Return to text. 41 Fredrick Dietz, An Economic History of England (New York: Henry Holt and Company, 1942), 263.
Return to text. 42 Ibid., 267.
Return to text. 43 See Allen, Enclosure and the Yeoman.
Return to text. 44 Finer, History of Government, 1325.
Return to text. 45 Robert Brenner, “Agrarian Class Structure and Economic Development,” in The Brenner Debate, ed. T. H. Aston and C. H. E. Philipin (Cambridge, U.K.: Cambridge University Press, 1985).
Return to text. 46 Patrick Karl O’Brien, “Path Dependency, or Why Britain Became an Industrialized and Urbanized Economy Long before France,” Economic History Review 49 (1996): 240.
Return to text. 47 Peter McPhee, “The French Revolution, Peasants, and Capitalism,” American Historical Review 94 (1989): 1265–1280.
Return to text. 48 See R. Rajan and L. Zingales, “Which Capitalism? Lessons from the East Asian Crisis,” Journal of Applied Corporate Finance 11 (1998): 40–48, for an early statement of this point in a different context.
Return to text. 49 Regressions available from the authors.
Return to text. 50 In an atmosphere in which property rights are not enforced, it is better for a skilled lord to let the wealth be “buried” in the ground and draw it out at regular intervals to pay his peasants than to convert it into cash and see them take it away.
Return to text. 51 See Kenneth Sokoloff and Stanley L. Engerman, “Institutions, Factor Endowments, and Paths of Development in the New World,” Journal of Economic Perspective 3 (2000): 217–232.
Return to text. 52 John P. Powelson, The Story of Land: A World History of Land Tenure and Agrarian Reform (Cambridge, Mass.: Lincoln Institute of Land Policy, 1988), 89.
Return to text. 53 See Abhijit Banerjee and Lakshmi Iyer, “History, Institutions, and Economic Performance: The Legacy of Colonial Land Tenure Systems in India,” MIT, working paper, 2002.
Return to text. 54 See D. Acemoglu, S. Johnson, and J. Robinson, “The Colonial Origins of Comparative Development: An Empirical Study,” American Economic Review 91 (2001): 1369–1401, for a theory of development based on the pattern of settlement.
Return to text. 55 See, for example, Maxim Boycko, Andrei Shleifer, and Robert Vishny, Privatizing Russia (Cambridge: Massachusetts Institute of Technology, 1995). Hindsight is always twenty-twenty. In all fairness, given that there was little in the way of an entrepreneurial class, those who reformed Russia had very little with which to work and not much guidance from past work. Many of the recent advances in institutional economics have come from those who learned from their Russian experiences.
Return to text. 56 Richard Ehrenberg, Capital and Finance in the Age of the Renaissance: A Study of the Fuggers and Their Connections (New York: Harcourt, 1928).
7: THE IMPEDIMENTS TO FINANCIAL DEVELOPMENT 1 This account is based on E. Glaeser, S. Johnson, and A. Shleifer, “Coase vs. the Coasians,” Quarterly Journal of Economics 116, no. 3 (2001): 853–899.
Return to text. 2 Alexander Dyck and Luigi Zingales, “Private Benefits of Control: An International Comparison,” NBER working paper no. 8711, 2002.
Return to text. 3 Glaeser, Johnson, and Shleifer, “Coase vs. the Coasians.”
Return to text. 4 Dyck and Zingales, “Private Benefits of Control.”
Return to text. 5 Glaeser, Johnson, and Shleifer, “Coase vs. the Coasians.”
Return to text. 6 Carol J. Simon, “The Effect of the 1933 Securities Act on Investor Information and the Performance of New Issues,” American Economic Review 79, no. 3 (1989): 295–318.
Return to text. 7 R. La Porta, F. Lopez-de-Silanes, A. Shleifer, and R. Vishny, “Investor Protection and Corporate Valuation,” Journal of Finance 57, no. 3 (2002): 1147–1171.
Return to text. 8 U. Bhattacharya and H. Daouk, “The World Price of Insider Trading,” Journal of Finance 57 (2002): 75–108.
Return to text. 9 As quoted in Paul Halpern, Michael Trebilcock, and Stuart Turnbull, “An Economic Analysis of Limited Liability in Corporate Law,” University of Toronto Law Review 117 (1980): 30.
Return to text. 10 Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups (Cambridge, Mass.: Harvard University Press, 1971), and G. Stigler, “Theory of Economic Regulation,” Bell Journal of Economics 2 (1971): 3–21.
Return to text. 11 Three eminent economists who contributed to the development of this work and who are still active are Sam Peltzman (“Toward a More General Theory of Regulation,” Journal of Law and Economics 19, no. 2 [1976]: 211–240), Richard Posner (“Taxation by Regulation,” Bell Journal of Economics 2 [1971]: 22–50), and Gary Becker (“A Theory of Competition among Pressure Groups for Political Influence,” Quarterly Journal of Finance 98, no. 3 [1983]: 371–400).
Return to text. 12 These are 1997 data from the Taxi and Limousine Commission, reported in www.schallerconsult.com/taxi/intro.htm.
Return to text. 13 The term rational ignorance was coined by Anthony Downs, An Economic Theory of Democracy (New York: Harper & Brothers, 1957).
Return to text. 14 See R. Rajan and L. Zingales, “The Tyranny of Inequality: An Inquiry into the Adverse Consequences of Power Struggles,” Journal of Public Economics 76 (2000): 521–558, for a development of these ideas.
Return to text. 15 Cited in Randall Morck, David Strangeland, and Bernard Yeung, “Inherited Wealth, Corporate Control, and Economic Growth: The Canadian Disease?” in Concentrated Capital Ownership, ed. R. K. Morck (Chicago: University of Chicago Press, 2000), 347.
Return to text. 16 Tarun Khanna and Krishna Palepu, “Is Group Affiliation Profitable in Emerging Markets?” Journal of Finance 55, no. 2 (2000): 867–891.
Return to text. 17 Simeon Djankov, Rafael La Porta, Florencio Lopez de Silanes, and Andrei Shleifer, “The Regulation of Entry,” NBER working paper no. 7892, 2000.
Return to text. 18 This negative relationship is statistically significant, and regression estimates show that it persists after correcting for the level of GDP per capita and a constant term.
8: WHEN DOES FINANCE DEVELOP? 1 Rondo Cameron, Banking in the Early Stages of Industrialization (London: Oxford University Press, 1967), 102.
Return to text. 2 Ibid., 103.
Return to text. 3 Ibid., 104–106.
Return to text. 4 Rondo Cameron, France and the Economic Development of Europe, 1800–1914 (Princeton, N.J.: Princeton University Press, 1961), 84. Also see David Landes, “French Entrepreneurship and Industrial Growth in the Nineteenth Century,” The Journal of Economic History 9, no. 1 (May 1949), 45–61.
Return to text. 5 Cameron, France, 86, 98, 99.
Return to text. 6 Ibid., 100. Also see Niall Ferguson, The House of Rothschild: The World’s Banker 1849–1999 (New York: Viking, 1999), 61.
Return to text. 7 Ibid., 103.
Return to text. 8 Cameron, Banking in the Early Stages of Industrialization, 105. Ferguson, The House of Rothschild, 62–64.
Return to text. 9 Ibid., Cameron, France, 106.
Return to text. 10 Ferguson, The House of Rothschild, 82–87.
Return to text. 11 Cameron, Banking in the Early Stages of Industrialization, 104.
Return to text. 12 Ibid., 130.
Return to text. 13 Elizabeth Plautet, The Role of Banks in Monitoring Firms: The Case of Crédit Mobilier (New York: Routledge, 1999), 14.
Return to text. 14 Ferguson, The House of Rothschild, 86–87.
Return to text. 15 The more it changes, the more it is the same thing.
Return to text. 16 Alessandro Aleotti, Borsa e Industria (Milan: Edizioni Comunità, 1990), 99.
Return to text. 17 R. Kroszner and P. Strahan, “What Drives Deregulation? Economics and Politics of the Relaxation of Bank Branching Restrictions,” Quarterly Journal of Economics 114, no. 4 (November 1999): 1437–1467.
Return to text. 18 Ibid.
Return to text. 19 M. Petersen and R. Rajan, “Does Distance Still Matter? The Information Revolution in Small Business Lending,” Journal of Finance (forthcoming, 2002).
Return to text. 20 Kroszner and Strahan, “What Drives Deregulation?”
Return to text. 21 J. Jayaratne and P. Strahan, “The Finance-Growth Nexus: Evidence from Bank Branching Deregulation,” Quarterly Journal of Economics 111, no. 3 (1996): 639–670.
Return to text. 22 Sofia A. Perez, “From Cheap Credit to the EC: The Politics of Financial Reform in Spain,” in Capital Ungoverned, ed. Michael Loriaux et al. (Ithaca, N.Y.: Cornell University Press, 1997).
Return to text. 23 Ibid., 170, 190.
Return to text. 24 John Zysman, Governments, Markets, and Growth: Finance and the Politics of Industrial Change (Ithaca, N.Y.: Cornell University Press, 1983), 155–156.
Return to text. 25 Ibid., 157.
Return to text. 26 Ibid., 129.
Return to text. 27 Nigel Adama, “L’État c’est nous,” Euromoney, October 1980, 110, cited in Zysman, Governments, Markets, and Growth, 114.
Return to text. 28 Ibid., 133.
Return to text. 29 For one thing, because of product market competition, these firms will now be much less profitable while needing much more investment. Moreover, competition in financial markets will make long-term relationships, through which the traditional financier could have hoped to recover investments, more difficult. Both factors would combine to make finance more difficult.
Return to text. 30 See Frances Rosenbluth, Financial Politics in Contemporary Japan (Ithaca, N.Y.: Cornell University Press, 1989).
Return to text. 31 For a detailed account of the Bond Committee, see Mark Ramseyer, “Explicit Reasons for Implicit Contracts: The Legal Logic to the Japanese Main Bank System,” in The Japanese Main Bank System, ed. M. Aoki and H. Patrick (New York: Oxford University Press, 1994), 238–239, and Rosenbluth, Financial Politics in Contemporary Japan.
Return to text. 32 Rosenbluth, Financial Politics in Contemporary Japan, 146.
Return to text. 33 Ibid., 149.
Return to text. 34 Ibid., 56.
Return to text. 35 Ibid., 163.
Return to text. 36 Technically, it is the ratio of equity issues by publicly traded companies to gross fixed capital formation, which represents total investments, not just corporate investments.
Return to text. 37 See R. Rajan and L. Zingales, “The Great Reversals: The Politics of Financial Development in the 20th Century,” Journal of Financial Economics (forthcoming, 2002), for details. Openness to trade is the sum of exports and imports divided by GDP. In drawing this graph, we have adjusted for the obvious relationship that more industrialized countries should have larger equity markets. So we plot the residual (in a regression of the total equity market capitalization to GDP against a constant and an index of industrialization for the country in 1913) against the product of industrialization and openness. The product of industrialization and openness is meant to capture the fact that openness can only undermine incumbents’ opposition to the development of finance, not create a demand for finance where that does not exist.
Return to text. 38 We instrument openness with exogenous drivers of trade such as a country’s population to show that the exogenous and predetermined component of trade is correlated with financial development. H. Svalaeryd and J. Vlachos, “Market for Risk and Openness to Trade: How Are They Related?” Journal of Public Economics 57, no. 2 (2002), 364–395, find that openness causes financial development, but they do not find evidence of the opposite.
Return to text. 39 Randall K. Morck, David A. Strangeland, and Bernard Yeung, “Inherited Wealth, Corporate Control, and Economic Growth: The Canadian Disease?” in Concentrated Capital Ownership, ed. R. K. Morck (Chicago: University of Chicago Press, 2000).
Return to text. 40 Ibid.
9: THE GREAT REVERSAL BETWEEN WARS 1 See Barry J. Eichengreen, Globalizing Capital: A History of the International Monetary System (Princeton, N.J.: Princeton University Press, 1996), and Peter Temin, Lessons from the Great Depression (Cambridge, Mass.: MIT Press, 1989), for excellent accounts.
Return to text. 2 Eichengreen, Globalizing Capital, 31.
Return to text. 3 William H. McNeill, The Pursuit of Power: Technology, Armed Force and Society since AD 1000 (Chicago: University of Chicago Press, 1982), 339.
Return to text. 4 Eichengreen, Globalizing Capital, 4.
Return to text. 5 Temin, Lessons from the Great Depression, 11. Charles Feinstein, Peter Temin, and Gianni Toniolo, The European Economy between the Wars (Oxford: Oxford University Press, 1997).
Return to text. 6 Charles S. Maier, In Search of Stability: Explorations in Historical Political Economy (Cambridge, U.K.: Cambridge University Press, 1987), 87.
Return to text. 7 Cited in Maier, In Search of Stability, 84.
Return to text. 8 Franklin D. Roosevelt, Public Papers and Addresses, vol. 2 (New York: Russel & Russel, 1933), 11–12.
Return to text. 9 Franklin D. Roosevelt, Public Papers and Addresses, vol. 3 (New York: Russel & Russel, 1934), 414.
Return to text. 10 Franklin D. Roosevelt, Public Papers and Addresses, vol. 5 (New York: Russel & Russel, 1936), 232–233.
Return to text. 11 Roosevelt, Public Papers and Addresses, vol. 2, 264–265.
Return to text. 12 See Kevin H. O’Rourke and Jeffrey G. Williamson, Globalization and History: The Evolution of the Nineteenth-Century Atlantic Economy (Cambridge, Mass.: MIT Press, 1999), for an excellent recent survey.
Return to text. 13 David M. Kennedy, Freedom from Fear: The American People in Depression and War, 1929–45 (New York: Oxford University Press, 1999), 179.
Return to text. 14 Roosevelt, Public Papers and Addresses, vol. 2, 202.
Return to text. 15 Luigi Zingales, “The Survival of the Fittest or the Fattest: Exit and Financing in the Trucking Industry,” Journal of Finance 53 (1998): 905–938.
Return to text. 16 Denis A. Breen, “The Monopoly Value of Household-Goods Carrier Certificates,” Journal of Law and Economics 20 (1977): 153–185.
Return to text. 17 Sam Peltzman, “Toward a More General Theory of Regulation,” Journal of Law and Economics 19 (1976): 211–240, and “The Economic Theory of Regulation after a Decade of Deregulation,” Brookings Papers on Economic Activity: Microeconomics (1989): 1–41, offers a view of regulation in which not just the regulated firms but a variety of interest groups share the spoils in proportion to their political power.
Return to text. 18 Nancy L. Rose, “Labor Rent Sharing and Regulation: Evidence from the Trucking Industry,” Journal of Political Economy 95 (1998): 1146–1178.
Return to text. 19 Kennedy, Freedom from Fear, 177.
Return to text. 20 McNeill, The Pursuit of Power, 346.
Return to text. 21 G. Borgatta, “La politica monetaria nel sistema corporativo,” Annali di Economica 12 (Padova, 1937): 257.
Return to text. 22 Gianni Toniolo, “Crisi economica e smobilizzo pubblico delle banche miste (1930–1934),” in Industria e banca nella grande crisi 1929–1934, ed. G. Toniolo (Milano: Etas Libri, 1978).
Return to text. 23 Ibid., 330.
Return to text. 24 P. Mazzucchelli in Rivista Bancaria (1933), cited in Aleotti, Borsa e Industria, 117.
Return to text. 25 Toniolo, “Crisi economica e smobilizzo pubblico delle banche miste,” 329.
Return to text. 26 The chairman of the Confederation of Industrialists stated in front of a parliamentary commission created in 1946 to decide the fate of the state holding company IRI: “From the economic point of view if we could think that the private sector was able to absorb IRI we could say: let’s liquidate IRI and have it bought by the private sector. But today we could not think of a private company able to buy, let’s say, Ansaldo.” Ministero per la Costitiente, 1946, p. 89, cited in F. Barca and S. Trento, “La Parabola delle partecipazioni statali: Una missione tradita,” in Storia del capitalismo Italiano, ed. F. Barca (Rome: Donzelli Editore, 1997).
Return to text. 27 Toniolo, “Crisi economica e smobilizzo pubblico delle banche miste,” 331.
Return to text. 28 Marcello de Cecco and Giovanni Ferri, Le banche d’affari in Italia (Bologna: Il Mulino, 1996).
Return to text. 29 Barca and Trento, “La Parabola delle partecipazioni statali,” 194.
Return to text. 30 Giancarlo Galli, Il padrone dei padroni (Milano: Garzanti, 1995).
Return to text. 31 G. Ferri and S. Trento, “La dirigenza delle grandi bancje e delle grandi imprese: Ricambio e legami,” in Storia del capitalismo Italiano, ed. F. Barca (Rome: Donzelli Editore, 1997).
Return to text. 32 Galli, Il padrone dei padroni, 74.
Return to text. 33 Ibid., 83.
Return to text. 34 Napoleone Colajanni, Il capitalismo senza capitale (Milano: Sperling and Kupfer, 1991), 64, as cited in Galli, Il padrone dei padroni, 83.
Return to text. 35 Galli, Il padrone dei padroni, 9.
Return to text. 36 Barca and Trento, “La Parabola delle partecipazioni statali.”
Return to text. 37 Marcello De Cecco, Saggi di politica monetaria (Milan: Giuffre, 1968), 40.
Return to text. 38 M. Pagano, F. Panetta, and L. Zingales, “Why Do Companies Go Public? An Empirical Analysis,” National Bureau of Economic Research, working paper, 1995.
Return to text. 39 M. Pagano, F. Panetta, and L. Zingales, “Why Do Companies Go Public? An Empirical Analysis,” Journal of Finance 53 (February 1998): 27–67.
Return to text. 40 M. Aoki, H. Patrick, and P. Sheard, “The Japanese Main Bank System: An Overview,” in The Japanese Main Bank System, ed. M. Aoki and H. Patrick (New York: Oxford University Press, 1994), and T. Hoshi and A. Kashyap, Corporate Finance and Government in Japan (Cambridge, Mass.: MIT Press, 2001), 59, table 3.2.
Return to text. 41 J. M. Ramseyer and F. M. Rosenbluth, The Politics of Oligarchy (New York: Cambridge University Press, 1995), 104.
Return to text. 42 This paragraph is drawn from Hoshi and Kashyap, Corporate Finance and Government in Japan, 29.
Return to text. 43 Ibid., 58.
Return to text. 44 Aoki, Patrick, and Sheard, “The Japanese Main Bank System,” 44.
Return to text. 45 These figures are from J. Teranishi, “Loan Syndication in WarTime Japan,” in The Japanese Main Bank System, ed. M. Aoki and H. Patrick (New York: Oxford University Press, 1994), 57, table 2.2.
Return to text. 46 That this was a cartel is further reinforced by Hoshi and Kashyap’s observation that security houses that were not part of the 1931 agreement started competing fiercely for underwriting business and continued to underwrite unsecured bonds. Thus, the market itself did not appear to develop a distaste for unsecured bonds. Hoshi and Kashyap, Corporate Finance and Government in Japan, 31.
Return to text. 47 Tetsuji Okazaki (1991), 382, cited in Hoshi and Kashyap, Corporate Finance and Government in Japan, 61.
Return to text. 48 Hoshi and Kashyap, Corporate Finance and Government in Japan, 80.
Return to text. 49 Lucian Bebchuk and Mark J. Roe, “A Theory of Path Dependence in Corporate Ownership and Governance,” Stanford Law Review 52 (1999): 127–170, develop a theory of path dependence of governance to account for phenomena such as these.
Return to text. 50 Mark J. Roe, Strong Managers, Weak Owners: The Political Roots of American Corporate Finance (Princeton, N. J.: Princeton University Press, 1994).
Return to text. 51 See G. Benston, “The Origins and Justification for the Glass-Steagall Act,” in Universal Banking in the United States: What Could We Gain? What Could We Lose? ed. A Saunders and I. Walter (New York: Oxford University Press, 1994).
Return to text. 52 Paul G. Mahony, “The Political Economy of the Securities Act of 1933,” working paper no. 00–11, Social Science Research Network, 2000, 8.
Return to text. 53 R. Kroszner and R. Rajan, “Organization Structure and Credibility: Evidence from the Commercial Bank Securities Activities before the Glass-Steagall Act,” Journal of Monetary Economics 39 (1997): 475–516.
Return to text. 54 Mahony, “Political Economy of the Securities Act of 1933.”
Return to text. 55 See George J. Benston, The Separation of Commercial and Investment Banking: The Glass-Steagall Act Revisited and Reconsidered (New York: Oxford University Press, 1990), for general evidence and R. Kroszner and R. Rajan, “Is the Glass-Steagall Act Justified? A Study of the U.S. Experience with Universal Banking before 1933,” American Economic Review 84 (September 1994): 810–832, for systematic evidence.
Return to text. 56 See Kroszner and Rajan, “Organization Structure and Credibility.”
Return to text. 57 See Roe, Strong Managers, Weak Owners.
Return to text. 58 See Benston, “Origins and Justification for the Glass Steagall Act,” 38.
Return to text. 59 Mahony, “Political Economy of the Securities Act of 1933.”
10: WHY WAS THE MARKET SUPPRESSED? 1 Standard and Poor’s, “U.S. Steel Tariffs: Who Gains, Who Loses, and at What Price?,” March 14, 2002.
Return to text. 2 AISI, “The New Steel Industry,” www.steel.org/facts/newsindus.htm.
Return to text. 3 Employment numbers are from Bureau of Labor Statistics, National Current Employment Statistics, www.bls.gov/webapps/legacy/cesbtabl.htm. Production numbers from American Iron and Steel Industry, 1997 Annual Statistical Report.
Return to text. 4 Alan Greenspan, chairman, Federal Reserve Board, before the Senate Banking Committee, July 28, 1999.
Return to text. 5 W. H. Barringer and K. J. Pierce, 256–257, cited in B. Linsey, D. Griswold, and A. Lucas, “The Steel “Crisis” and the Costs of Protectionism,” Cato Institute, trade briefing paper, April 16, 1999, 6.
Return to text. 6 www.steelnet.org.
Return to text. 7 Economist, “Anger over Steel,” March 11, 2002.
Return to text. 8 Economist, “Romancing Big Steel,” February 14, 2002.
Return to text. 9 W. H. Barringer and K. J. Pierce, 112, cited in Dan Ikenson, “Steel Trap: How Subsidies and Protectionism Weaken the U.S. Steel Industry,” Cato Institute, trade briefing paper, March 1, 2002, 5.
Return to text. 10 “Rep. Brown Joins Calls for Immediate Assistance to Steel Industry,” press release of the office of Rep. Sherrod Brown, D-Ohio (13th district), December 19, 2001, cited in Ikenson, “Steel Trap,” 3 (emphasis added).
Return to text. 11 See Dan Ikenson, “Steel Trap.”
Return to text. 12 Gosnell (1937), 321–329, cited in Frances Fox Piven and Richard Cloward, Regulating the Poor: The Functions of Public Welfare (New York: Vintage, 1971), 62.
Return to text. 13 Piven and Cloward, Regulating the Poor, 63.
Return to text. 14 See an extensive compilation of material on Ponzi at www.mark-knutson.com.
Return to text. 15 See David McCullough, The Path between Seas: The Creation of the Panama Canal, 1870–1914 (London: Simon and Schuster, 1977).
Return to text. 16 See Marco Pagano and Paolo Volpin, “The Political Economy of Finance,” CEPR discussion paper no. 3231, 2002, for a model in which management and workers get together to bilk investors. The former get a quiet life, while the latter get employment security. This is an attractive model. Our point, however, is that the antimarket consensus is much broader and is catalyzed by bad times.
Return to text. 17 Vito Tanzi and Ludger Schuknecht, Public Spending in the 20th Century: A Global Perspective (Cambridge, U.K.: Cambridge University Press, 2000), 31.
Return to text. 18 Ibid.
Return to text. 19 Peter Gourevitch, Politics in Hard Times: Comparative Responses to International Economic Crises (Ithaca, N.Y.: Cornell University Press, 1986).
Return to text. 20 Harold Wilensky and Lowell Turner, Democratic Corporatism and Policy Linkages: The Interdependence of Industrial, Labour-Market, Incomes, and Social Policies in Eight Countries (Berkeley: Institute of International Studies, University of California, Berkeley, 1987), 12.
Return to text. 21 Steven Nickell, “Unemployment and Labor Market Rigidities: Europe versus North America,” Journal of Economic Perspectives 11, no. 3 (summer 1997): 55–74.
Return to text. 22 U. Bhattacharya and H. Daouk, “The World Price of Insider Trading,” Journal of Finance 57, no. 1 (2002): 75–108.
Return to text. 23 Kristian Rydqvist and Kenneth Hogholm, “Going Public in the 1980s: Evidence from Sweden,” European Financial Management 1 (1995): 287–315.
Return to text. 24 Paul Gompers, “Grandstanding in the Venture Capital Industry,” Journal of Financial Economics 42 (1996): 133–156.
Return to text. 25 R. La Porta, F. Lopez-de-Silanes, and A. Shleifer, “Government Ownership of Banks,” NBER working paper no. 7620, 2000.
Return to text. 26 Dimitri Vittas and Yoon Je Cho, “Credit Policies: Lessons from East Asia,” The World Bank, 1994.
Return to text. 27 Ibid.
Return to text. 28 Michael Loriaux, “Socialist Monetarism and Financial Liberalization in France,” in Capital Ungoverned, ed. Michael Loriaux et al. (Ithaca, N.Y.: Cornell University Press, 1997), 143.
Return to text. 29 Ibid.
Return to text. 30 For the difficulty for large bureaucracies in financing small firms, see A. Berger, N. Miller, M. Petersen, R. Rajan, and J. Stein, “Does Function Follow Organizational Form? Evidence from the Lending Practices of Large and Small Banks,” NBER working paper w8752, 2002. For the effects of state ownership on the allocation of credit, see Paola Sapienza, “What Do State-Owned Firms Maximize? Evidence from Italian Banks,” Northwestern University, working paper, 2002.
Return to text. 31 For excellent accounts, see E. Helleiner, States and the Reemergence of Global Finance: From Bretton Woods to the 1990’s (Ithaca, N.Y.: Cornell University Press, 1994), and Robert Skidelsky’s authoritative biography of Keynes, especially volume 3: Robert Skidelsky, John Maynard Keynes: Fighting for Freedom 1937–1946 (New York: Viking, 2001).
Return to text. 32 Keynes (1980), 149, cited in Helleiner, States and the Reemergence of Global Finance, 34. The interest rate that really matters for investment is the long-term interest rate. There is much less consensus today that long-term interest rates can be easily manipulated by the government.
Return to text. 33 Helleiner, States and the Reemergence of Global Finance, 35.
Return to text. 34 Ibid., 39.
Return to text. 35 Pauly.
Return to text. 36 Peter G. Peterson, Gray Dawn: How the Coming of Age Will Transform America and the World (New York: Times Books, 1999), 77.
11: THE DECLINE AND FALL OF RELATIONSHIP CAPITALISM 1 These figures and the ones that follow in this section (unless stated otherwise) are from Stephen Prowse, “Alternative Models of Financial System Development,” Federal Reserve Bank of Australia, 1996.
Return to text. 2 This is from Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny, “Legal Determinants of External Finance,” Journal of Finance 52, no. 3 (1997): 1131–1150.
Return to text. 3 See Julian Franks and Colin Mayer, “Bank Control, Takeovers and Corporate Governance in Germany,” Journal of Banking & Finance 22 (1998): 1231–1480.
Return to text. 4 See, for example, the discussion in Christoph von Greyerz, “Accounting in Swiss Company Law,” Der Schweizer Treuhander (March 1984): 85–88.
Return to text. 5 Prowse, “Alternative Models of Financial System Development,” 122, citing 1989 OECD study.
Return to text. 6 See Utpal Bhattacharya, Hazen Daouk, and Michael Welker, “The World Price of Earnings Opacity.”
Return to text. 7 Graham Searjent, “Why Daimler Went Red over a Share Quote in New York,” Times (London), October 7, 1993.
Return to text. 8 Cited by Martin Hellwig in “Economics and Politics of Corporate Finance and Control,” in Corporate Governance: Theoretical and Empirical Perspectives, ed. Xavier Vives (Cambridge: Cambridge University Press, 2000), 109.
Return to text. 9 See Steven N. Kaplan, “Top Executive Rewards and Firm Performance: A Comparison of Japan and the United States,” Journal of Political Economy 102, no. 3 (June 1994): 510–546.
Return to text. 10 See C. Kester and T. Lueherman, “The Myth of Japan’s Low Cost of Capital,” Harvard Business Review 70, no. 3 (May 1, 1992): 130–140.
Return to text. 11 This analogy is based on work by Raaj Sah and Joseph Stiglitz, “The Architecture of Economic Systems: Hierarchies and Polyarchies,” American Economic Review 76, no. 4 (September 1986). Also see Franklin Allen, “Stock Markets and Resource Allocation,” in Capital Markets and Financial Intermediation, ed. Colin Mayer and Xavier Vives (Cambridge, U.K.: Cambridge University Press, 1993), for a different application of the Sah and Stiglitz point.
Return to text. 12 B. Black and R. Gilson, “Venture Capital and the Structure of Capital Markets: Banks versus Stock Markets,” Journal of Financial Economics, 47 (1998). Jörg Kukies, “Stock Markets for High-Technology Firms and Venture Capital Financing: Evidence from Europe” (University of Chicago, Ph.D. diss., 2001).
Return to text. 13 Kukies, “Stock Markets for High-Technology Firms and Venture Capital Financing.”
Return to text. 14 See Paul Carroll, Big Blues: The Unmaking of IBM (New York: Crown, 1993), for example, p. 76.
Return to text. 15 Kristian Rydqvist and Kenneth Hogholm, “Going Public in the 1980s: Evidence from Sweden,” European Financial Management 1, no. 3 (1995): 287–315.
Return to text. 16 Sandra Black and Philip Strahan, “Entrepreneurship and Bank Credit Availability” (MIT, March 2001, mimeo).
Return to text. 17 The description of this case relies heavily on Richard Pascale and Thomas P. Rohlen, “The Mazda Turnaround,” Journal of Japanese Studies 9, no. 2 (1983): 219–263, and Hoshi and Kashyap (1994). Unless stated otherwise, all figures come from their work.
Return to text. 18 Authors’ calculations using the Penn World Tables data.
Return to text. 19 For a discussion of the relative merits of relationship and market-based systems, see R. Rajan and L. Zingales, “Which Capitalism? Lessons from the East Asian Crisis,” Journal of Applied Corporate Finance 11, no. 3 (fall 1998): 40–48.
Return to text. 20 Vito Tanzi and Ludger Schuknecht, Public Spending in the 20th Century: A Global Perspective (Cambridge, U.K.: Cambridge University Press, 2000).
Return to text. 21 There is a long and somewhat obscure history behind this point that inflation is a political phenomenon. See E. M. Bernstein and I. G. Patel, “Inflation and Economic Development,” IMF Staff Papers, 1953, for an early version, and Lester Thurow, The Zero-Sum Society: Distribution and the Possibilities for Economic Change (New York: Basic Books, 1980).
Return to text. 22 Helleiner, States and the Reemergence of Global Finance: From Bretton Woods to the 1990’s, 85.
Return to text. 23 Barry J. Eichengreen, Globalizing Capital: A History of the International Monetary System (Princeton, N. J.: Princeton University Press, 1996), 129.
Return to text. 24 U.S. government (1973), 128, cited in Helleiner, States and the Reemergence of Global Finance, 106.
Return to text. 25 Helleiner, States and the Reemergence of Global Finance, 114.
Return to text. 26 Graciela Kaminsky and Sergio Schmukler, “Short-Run Pain, Long-Run Gain: The Effects of Financial Liberalization,” working paper, World Bank, 2002.
Return to text. 27 See, for example, Daniel Yergin and Joseph Stanislaw, The Commanding Heights: The Battle between Government and the Marketplace That Is Remaking the Modern World (New York: Touchstone, 1999).
Return to text. 28 Prominent among the older critics was Karl Polanyi, The Great Transformation (Boston: Beacon Hill, 1944). Among the newer ones is Dani Rodrik, Has Globalization Gone Too Far? (Washington, D.C.: Institute for International Economics, 1997).
Return to text. 29 For the classic statement, see Polanyi, Great Transformation.
12: THE CHALLENGES AHEAD 1 While Francis Fukuyama qualifies his message at the end of his book, this is what most readers would take away. Francis Fukuyama, The End of History and the Last Man (New York: Free Press, 1992).
Return to text. 2 The Wealth of Nations, book 1, chapter 10.
Return to text. 3 Ralph Waldo Emerson (May 1837), quoted in Charles Warren, Bankruptcy in United States History (Cambridge, Mass.: Harvard University Press, 1935), 56.
Return to text. 4 Ian Domowitz and Elie Tamer, “Two Hundred Years of Bankruptcy: A Tale of Legislation and Economic Fluctuations,” Institute for Policy Research at Northwestern University, working paper, 1997.
Return to text. 5 Erik Berglof and Howard Rosenthal, “The Political Economy of American Bankruptcy: The Evidence for Roll-Call Voting, 1800–1978” (paper presented at UCLA, Political Economy of Contractual Obligations, 1999).
Return to text. 6 Noel F. Regis, A History of the Bankruptcy Law (Washington, D.C: C. H. Potter & Co., 1919), 143–144.
Return to text. 7 C. Warren, Bankruptcy in United States History (Cambridge, Mass.: Harvard University Press, 1935), 37.
Return to text. 8 Ibid., 8.
Return to text. 9 Authors’ calculations from R. Freeman and R. Oostendorop, “Occupational Wages around the World Database,” NBER (www.nber.org/oww).
Return to text. 10 See Stefanie Lenway, Randall Morck, and Bernard Yeung, “Rent Seeking, Protectionism, and Innovation in the American Steel Industry,” Economic Journal 106 (1996): 410–421.
Return to text. 11 M. Huson, R. Parrino, and L. Starks, “Internal Monitoring Mechanisms and CEO Turnover: A Long-Term Perspective,” Journal of Finance 56 (2001): 2265–2298.
Return to text. 12 Robert Parrino, “CEO Turnover and Outside Succession: A Cross-sectional Analysis,” Journal of Financial Economics 46 (1997): 165–197, and Michael S. Weisbach, “Outside Directors and CEO Turnover,” Journal of Financial Economics 20 (1988): 431–461.
Return to text. 13 Rafael La Porta et al., “Corporate Ownership around the World,” Journal of Finance 54 (1999): 471–517.
Return to text. 14 Francisco Perez Gonzalez, “Does Inherited Control Hurt Firm Performance?” Columbia University, working paper, 2002.
Return to text. 15 Vito Tanzi and Ludger Schuknecht, Public Spending in the 20th Century: A Global Perspective (Cambridge, U.K.: Cambridge University Press), 123.
Return to text. 16 Nicholas Barr, The Welfare State as Piggy Bank: Information, Risk, Uncertainty, and the Role of the State (Oxford: Oxford University Press, 2001), 269.
Return to text. 17 U.S. Bureau, of the Census, Population Projections of the United States by Age, Sex, Race, and Hispanic Origin: 1995 to 2050 (Washington, DC: U.S. Bureau of the Census, February 1996).
Return to text. 18 Peter G. Peterson, Gray Dawn: How the Coming of Age Will Transform America and the World (New York: Times Books, 1999), 72, taxpayer per pensioner on p. 36.
13: SAVING CAPITALISM FROM THE CAPITALISTS 1 Manjeet Kripalani, “Polishing India’s Diamond Business,” Business Week, September 11, 2000.
Return to text. 2 Ibid.
Return to text. 3 See Mark J. Roe, Strong Managers, Weak Owners: The Political Roots of American Corporate Finance (Princeton, N.J.: Princeton University Press, 1994), for a discussion of how the financial sector has been kept from getting too powerful in the United States.
Return to text. 4 Of course, it is possible to concoct an example in which the more efficient producer has a greater incentive to lobby for subsidies (for example, if subsidies are based on quantities produced). The general intuitions on which we rely are that the more efficient producer sees greater value in facing a larger, unrestricted market and also does not worry much about local competition’s making a dent in that market, for there is plenty for everyone to share. Moreover, the efficient producer has a higher opportunity cost of spending time lobbying, and finally, if closure is immensely costly, the inefficient producer has a much stronger incentive to lobby for help to stave off otherwise certain closure.
Return to text. 5 Luigi Zingales, “The Survival of the Fittest or the Fattest: Exit and Financing in the Trucking Industry,” Journal of Finance 53 (1998): 905–938.
Return to text. 6 David Stromberg, “Radio’s Impact on Public Spending,” Stockholm School of Economics, working paper, 2001.
Return to text. 7 R. W. Fogel, The Fourth Great Awakening and the Future of Egalitarianism (Chicago: University of Chicago Press, 2000), 209, suggests that the median income of those households whose head is older than sixty-five is now equal to the income of those whose head is younger than sixty-five. Since they have fewer dependents, their per capita consumption power should be greater.
Return to text. 8 David Barker, “In Utero Programming of Chronic Disease,” Clinical Science 95, no. 2 (1998): 115–128. David Barker, “Maternal and Fetal Origins of Coronary Heart Disease,” Journal of the Royal College of Physicians 28, no. 6 (1994): 544–551. David Barker, “The Fetal Origins of Adult Hypertension,” Journal of Hypertension Supplement 10, no. 7 (1992): S39–44.
Return to text. 9 U.S. Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970 (Washington, DC: U.S. Bureau of the Census, 1975), 55.
Return to text. 10 Statistical Abstract of the United States, 1999 (Washington, DC: U.S. Bureau of the Census, 1999), 194.
Return to text. 11 See K. Olson, The G.I. Bill, the Veterans, and the Colleges (Lexington: University of Kentucky Press, 1974), and T. Skocpol, “The G.I. Bill and U.S. Social Policy, Past and Future,” in The Welfare State, ed. E. Paul, F. Miller, and J. Paul (New York: Cambridge University Press, 1997).
Return to text. 12 For two excellent books by economists on the virtues of free trade, see Douglas Irwin, Free Trade under Fire (Princeton, N.J.: Princeton University Press, 2002), and Jagdish Bhagwati, Free Trade Today (Princeton, N.J.: Princeton University Press, 2002). For a dissent, see Dani Rodrik, Has Globalization Gone Too Far? (Washington, D.C.: Institute for International Economics, 1997).
Return to text. 13 See Joseph E. Stiglitz, Globalization and Its Discontents (New York: Norton, 2002), for a detailed exposition of this view. We do not have the space here to mount a full defense of globalization. But others have. For two excellent nontechnical books, see Thomas Friedman, The Lexus and the Olive Tree (New York: Farrar, Straus and Giroux, 1999), and John Micklethwait and Adrian Wooldridge, A Future Perfect: The Challenge and the Hidden Promise of Globalization (New York: Crown Business, 2000).
Return to text. 14 Graciela Kaminsky and Sergio Schmukler, “Short-Run Pain, Long-Run Gain: The Effects of Financial Liberalization,” World Bank, working paper, 2002.
Return to text. 15 Of course, these trading zones are themselves aberrations. In the long run, we would hope they would give way to free trade.
Return to text. 16 These trading blocks do have adverse effects on overall trade. In the long run, it would clearly be better if they disappeared. In the short run, however, it makes sense to use them while they exist.
Return to text. 17 The fees are described by Phil Spender in “Second Hand Vehicle Imports Equals Doom?” Economic Times (Mumbai), January 18, 2000.
