Tuesday, October 18, 2011

Best Answer to a Midterm Question

We will be spending a good deal of time in the next part of my micro principles class talking explicitly about incentives. As a warm up to it and a check of the intuition we'd already covered, I asked them to consider a recent economics research paper. It looked at Italian banks and noted that some 1900 politicians served on banks' boards of directors. I asked how having a politician on the board would affect the bank's incentives.

About one fourth of the students came up with some version of the paper's results: those banks with a politician in an executive capacity gave out loans to political friends who were not necessarily good credit risks, so their balance sheets were in more trouble on average than banks that were not similarly blessed. The paper (here) however showed with more nuance that merely being on the board did not have a significant impact.

One person took it a step further: Politicians usually steal, this student wrote, and so a bank with a politician at its head would have no money to lend out.

I smell a candidate for some Libertarian literature.

1 comment:

  1. I agree with the fact that politician usually steal and they help only their friends and relatives in availing loans.

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