As part of the series of the „Finance Research Seminar“, VGSF welcomes Ravi Bansal from Duke University, The Fuqua School of Business to present his research paper.
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Paper
Democracy as a Hedge Asset: The Political Economy of the Growth-and-Risk Frontier
We show that democracy dominates autocracy by delivering both higher growth and lower risk, but a trade-off exists between democracy and high-capacity single-party rule. The former acts as a hedge asset: its lower long-run growth is the price of reduced downside volatility, reflected in lower equity risk premium. The latter achieves faster growth but at the cost of greater uncertainty, leaving open the question of where welfare is higher. To answer this question, we calibrate a macro-finance model that allows for heterogeneous preferences over consumption and political freedom. We estimate marginal rates of substitution between income and freedom in the data and show that once this non-pecuniary good is accounted for, welfare is unambiguously higher under democracy, even for equity holders.
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