No. 604 - The political economy of investor protection

Why do some countries suffer from backward _nancial institutions and weak corporate governance rules? We show that, even if, overall, the economy would bene_t from corporate governance reforms, not all the agents would stand to gain from the improvement. In particular, entrepreneurs and _rms that are already well-established fear better rules, which would allow the _nancing of new _rms and enhance competition. As a consequence, industry incumbents will try to in_uence the political process to block the reforms. If national political institutions are weak, these efforts are likely to be successful.