The Revolving Door, State Connections, and Inequality of Influence in the Financial Sector

47 Pages Posted: 28 Aug 2017 Last revised: 26 Sep 2018

See all articles by Elise S. Brezis

Elise S. Brezis

Bar-Ilan University - Department of Economics; National Bureau of Economic Research (NBER)

Joel Cariolle

Fondation pour les etudes et recherches sur le développement international (Ferdi)

Date Written: September 1, 2018

Abstract

This paper explains why the revolving door generates inequality of influence between financial firms and creates economic distortions. We show that big financial companies, especially the ones denoted as too-big-to-fail, can afford to hire many previous regulators, denoted as ‘revolvers’, and benefit from this strategy, while small firms in the same sector cannot afford it. We first develop a theoretical model, introducing the notion of ‘bureaucratic capital’ and stressing how the revolving door generates inequality in bureaucratic capital accumulation leading to inequality in profits. Then, the prediction that the bureaucratic capital is allocated towards the biggest firms is tested, using a new database tracking the revolving door process involving the 20 biggest US ‘diversified banks’. We show that regulators who supply a large stock of bureaucratic capital are more likely to be hired by the top-five banks. We also develop indices of the inequality of influence between banks. We show that banks in the top revenue quintile concentrate around 80% of revolving door movements. Goldman Sachs appears as the prime beneficiary of this process, by concentrating approximately 30% of the total stock of bureaucratic capital, corresponding to 698 years of accumulated public sector experience.

Keywords: regulators, revolving door, rent-seeking, state connections, bureaucratic capital, inequality of influence, connected firms, too-big-to-fail.

JEL Classification: D73; G01; G18; L51

Suggested Citation

Brezis, Elise S. and Cariolle, Joël, The Revolving Door, State Connections, and Inequality of Influence in the Financial Sector (September 1, 2018). Available at SSRN: https://ssrn.com/abstract=3025559 or http://dx.doi.org/10.2139/ssrn.3025559

Elise S. Brezis (Contact Author)

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 52900
Israel
972-3-5318946 (Phone)
972-3-5353186 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Joël Cariolle

Fondation pour les etudes et recherches sur le développement international (Ferdi) ( email )

63, boulevard François-Mitterrand
Clermont-Ferrand, 63000
France
+33473177542 (Phone)

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