Monday, 14 November 2016

German Cronyism and State Banks

Some 15 years ago, Ron McKinnon asked me why German state banks were not a source of major corruption, as they were in Brazil. I told him I had no idea, and wasn't sure if that assumption was actually true...

So now there is a clever new paper that shows precisely this. It's by Haselmann, Schoenherr, and Vig. Here's the abstract:

We employ a unique dataset on members of an elite service club in Germany to investigate how elite networks affect the allocation of resources. Specifically, we investigate credit allocation decisions of banks to firms inside the network. Using a quasi-experimental research design, we document misallocation of bank credit inside the network, with state-owned banks engaging most actively in crony lending. The aggregate cost of credit misallocation amounts to 0.13 percent of annual GDP. Our findings, thus, resonate with existing theories of elite networks as rent extractive coalitions that stifle economic prosperity.
The data underlying this is nothing short of amazing. I came across this because it connects with some recent work I have done on the dark side of social capital, but I think the measurement of misallocation method could be used in a wide variety of settings (not invented by Haselmann et al., as a matter of fact) -- if one could get the data.

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