Public Interest Models of Investor Protection. Several recent works explicitly incorporate the public interest into theories of investor protection. Xxxxxxx and von Thadden (2003, 2006) argue that high investor protection lowers the returns to labor while it increases the returns on financial capital. Drawing on the median voter theorem, the authors theorize that democracies in which the median voter relies more heavily on the returns to their labor than to their financial assets will have lower investor protection. Empirically, they argue that lower levels of investor protection in Europe and Japan relative to the US and UK can be traced to the (exogenous) destruction of financial capital during World War II, which effectively ensured that the median voter in the US and UK held a greater portion of their assets in financial capital. This approach has its limitations. First, the median voter theorem was developed to apply to majoritarian elections (an assumption that the authors preserve in their formal model), yet most of the European countries that eschewed shareholder capitalism following WWII adhered to various forms of proportional electoral rules. As Xxx (1990) notes, proportional electoral laws are centripetal in that they draw politicians to favor groups outside of the political center. Moreover, under proportional electoral rules politicians must often form multi-party coalitions to govern; parties that do not necessarily compete for the median voter are often given a large role in setting policy – acting as “kingmakers” (ex. Xxxxxx-Xxxxx and Banks 1988, Xxxxxx 1997). In short, there is little basis on which to assume that the median voter was the focus of policy attention in most of the countries Xxxxxxx and von Thadden examine.12 Bebchuk and Xxxxxx (forthcoming) offer a theory that is closely aligned with “common agency” models of policy making. Bebchuk and Xxxxxx argue that investor protection policy outcomes are a function of interest group politicking between corporate insiders, shareholders and entrepreneurs. Their model predicts that policies reflect the balance of power between these interests groups and their abilities to draw politicians away form their default, “socially optimal” policy, which is set at the point where the marginal cost to insiders equals the marginal benefit to shareholders. Voters are absent from their baseline model because “[they] largely do not follow this subject” (12). By implication, in the absence of a highly visible scandal, governments are held accountabl...
