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The Political Economy of Corporate Governance

by Marco Pagano and Paolo Volpin. Reading for November 23, 2004.

We analyze the political determinants of investor and employment protection. Our model predicts that proportional electoral systems are conducive to weaker investor protection and stronger employment protection than majoritarian systems. This prediction is consistent with international panel data evidence. The proportionality of the voting system is significantly and negatively correlated with shareholder protection in a panel of 45 countries, and positively correlated with employment protection in a panel of 21 OECD countries. Also other political variables appear to affect regulatory outcomes, especially for the labor market. The origin of the legal system has some additional explanatory power only for employment protection.

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