This paper — a revision of an earlier draft that was entitled "When Do Special Interests Run Rampant? Disentangling the Role of Elections, Incomplete Information and Checks and Balances in Banking Crises" — develops and tests a model of the effect of political checks and balances on the incentives of elected veto players to cater to special interests. A larger number of veto players reduces political incentives to make deals with special interests, but the effect is declining in the rents available from such deals. Evidence from country responses to banking crises supports these conclusions: governments make smaller fiscal transfers to the financial sector and are less likely to exercise forbearance in dealing with insolvent financial institutions the larger the number of political veto players, conditional on the value of rents at stake. This simple explanation for special interest influence is robust to controls for more subtle institutional effects that are prominent in the literature, including the competitiveness of elections, regime type (presidential versus parliamentary) and electoral rules (majoritarian versus proportional).
Keefer, Philip, "Banking Crises and the Effect of Political Checks and Balances on Special Interest Influence"(October 2001). Available at SSRN: http://ssrn.com/abstract=289112 or DOI: 10.2139/ssrn.289112