Accountability in Times of Crisis: Evidence from 40 Years of Financial Crises

• In Event: The Politics of Economic Crises, Social Inequality and Redistribution

Abstract

Using a novel dataset covering 88 countries between 1973 and 2015, we document that politicians in their final term of office are more likely to engage in financial de-liberalisation in the wake of a financial crisis than those facing re-election. We employ a difference-in-difference design and exploit within-country variation in the timing of term limits to show that politicians in their final term are more likely to pass de-liberalisation policies that favour financial institutions over the general population after a crisis occurs. For example, these politicians are more likely to increase barriers to entry and to bail out banks, while politicians up for re-election are more likely to increase bank supervision. This is consistent with a theory of political accountability in which crises generate two opposite effects: they increase the salience of financial policies to voters but also create a window of opportunity for politicians to push potentially harmful reforms. When the first effect dominates, crises amplify the accountability effect of elections and increase the differences in behaviour between politicians in their final term and those up for re-election. We confirm that the policies pushed by term-limited politicians are harmful to the general population by showing that financial instability is higher in the aftermath of crises when these politicians are in power. We also present evidence that revolving doors between the government and the private sector drive these differences: the effects are stronger in countries where revolving doors are more common and the political allies of term-limited leaders are more likely to pursue a career in private financial sector after leaving government.

Authors

• Orkun Saka

• Clement Minaudier, City, University of London