The Political Economy of the Subprime Mortgage Credit Expansion
ABSTRACT This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection as well as empirical evidence on the effects of patent rights. Then, the second part considers the international aspects of IPR protection. In summary, this paper draws the following conclusions from the literature. Firstly, different patent policy instruments have different effects on R&D and growth. Secondly, there is empirical evidence supporting a positive relationship between IPR protection and innovation, but the evidence is stronger for developed countries than for developing countries. Thirdly, the optimal level of IPR protection should tradeoff the social benefits of enhanced innovation against the social costs of multiple distortions and income inequality. Finally, in an open economy, achieving the globally optimal level of protection requires an international coordination (rather than the harmonization) of IPR protection.
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ABSTRACT: Politicians’ capability to direct market access puts them at the heart of a struggle between entrepreneurs for preferential access to a protected market. Using a single political economy framework we study how interest groups are formed to jointly offer political contributions in exchange for such preferential access. The effectiveness of these offers depends on the political influence of consumers who suffer from reduced production. In three chapters we closely examine differences in group formation under lobbying or bribing, the effects of bank ownership on the level of entry and financial stability, and the possibility that politicians favour entry of core constituents independent of their efficiency.
The Political Economy of the Subprime Mortgage
Atif Mian, Amir Sufi, and Francesco Trebbi∗
We examine how special interests, measured by campaign contributions from the
mortgage industry, and constituent interests, measured by the share of subprime bor-
rowers in a congressional district, may have influenced U.S. government policy towards
subprime mortgage credit expansion from 2002 to 2007. Beginning in 2002, mort-
gage industry campaign contributions increasingly targeted U.S. representatives from
districts with a large fraction of subprime borrowers. During the expansion years,
mortgage industry campaign contributions and the share of subprime borrowers in a
congressional district increasingly predicted congressional voting behavior on housing
related legislation. Such patterns do not hold for non-mortgage financial industry.
The evidence suggests that both subprime mortgage lenders and subprime mortgage
borrowers influenced government policy towards subprime mortgage credit expansion.
∗University of California, Berkeley, and NBER, firstname.lastname@example.org; University of Chicago Booth
School of Business and NBER, email@example.com; and University of British Columbia and NBER,
firstname.lastname@example.org, respectively. The authors would like to thank Daron Acemoglu, Chris Berry,
Matilde Bombardini, Patrick Francois, David Lucca, Riccardo Puglisi, and Guido Tabellini for useful com-
ments and discussion. Won-Il Jun provided excellent research assistance. We would also like to thank
seminar participants at Bocconi University, University of British Columbia, Princeton University, Stanford
University, Stockholm University, and the IMF for comments. We are grateful to the Initiative on Global
Markets at Chicago Booth for financial support.
The U.S. government has played a prominent role in the financial sector since the estab-
lishment of the Bank of the United States in 1792. Government intervention, at initiation,
is often well intentioned and justified by economic theory. However, once the government
is involved in the financial sector, individuals within the economy have strong incentives to
tailor government policy toward their own objectives. When government officials respond to
constituent and special interests by manipulating policy, the resulting effects for the financial
sector are potentially disastrous. For example, Calomiris (2009) argues that “...government
subsidies or special rights granted to favored participants in the banking system and the in-
centive consequences of those subsidies and rights ... has been at the center of the explanation
of the propensity of banking crises for the past two centuries.”
The importance of understanding how constituent and special interests affect govern-
ment policy toward the financial sector has been elevated given the U.S. mortgage default
crisis. Nominal house prices in the U.S. have fallen over 40 percent and the delinquent mort-
gage debt has risen to an astonishing $15 trillion. Anecdotal evidence suggests that U.S.
government support for mortgage credit toward low income, low credit quality households
was a main contributor to the severity of the 2008-2009 crisis.1During the height of the
subprime mortgage credit expansion from 2002 to 2007, government support for mortgage
lending to subprime borrowers took many forms, with support from both Republican and
Democratic fronts. Among the most prominent is the affordable housing mandate imposed
by the Department of Housing and Urban Development (HUD) on Freddie Mac and Fannie
Mae. However, as we discuss below, there were also prominent bills debated and passed in
the U.S. Congress that reduced regulation of subprime lenders and increased mortgage sup-
port for low income households. Some of these bills display prominent bipartisan support,
stemming from both social policy on the left and an “ownership society” discourse on the
1See Leonnig (2008), Barrett (2008), Calomiris and Wallison (2008), and Congleton (2009).
In this study, we examine how both constituent and special interests influenced U.S.
government policy toward the housing sector during the subprime mortgage credit expansion.
The direct effect of these interests on government policy is difficult to estimate for a
variety of reasons. For example, there are many government organizations that oversee
housing finance and regulation, including the Federal Reserve (consumer protection), HUD,
OFHEO (Oversight of Government Sponsored Enterprises, or GSEs, such as Freddie Mac
and Fannie Mae), and the United States Congress. Constituent and special interests may
influence policy at these various organizations in ways that are undetectable to researchers,
such as legislative effort (Hall and Wayman, 1990). In addition, the government efforts
themselves are varied, and so it is difficult to isolate a single bill or single action to estimate
the effect of constituent and special interests on government policy. Such variety also has
advantages however. We can focus our attention on bills that become law, as well as bills
that fail but nonetheless incorporate information on congressional alignments.
While these problems present a serious challenge, we are able to provide suggestive evi-
dence that highlights the important role of both constituent and special interests in housing
and housing finance public policy during the subprime mortgage credit expansion from 2002
to 2007. Taken together, the results suggest that constituent interests, measured with the
fraction of subprime borrowers in a given Congressional district before the subprime mortgage
expansion, and special interests, measured with campaign contributions from the mortgage
industry, both helped to shape government policies that encouraged the rapid growth of
subprime mortgage credit.
We begin with an examination of the pattern of campaign contributions toward repre-
sentatives from districts with a high fraction of subprime borrowers. For our analysis to be
meaningful it will not be necessary to explicitly assess whether money did buy congressional
votes or simply contributions improved the electoral odds of subprime champions. Under
2“Ownership society” is a phrase employed occasionally by President George W. Bush from 2003 onwards,
usually in contexts indicating support for property ownership as a channel towards higher civic engagement.
both scenarios campaign contributions will have induced heightened congressional support
for the mortgage industry, a fact we document. From 1994 to 2000, mortgage industry
campaign contributions toward high subprime representatives are relative steady. However,
beginning in the 107th Congress (2001-2002), there is a sharp relative rise in mortgage indus-
try campaign contributions toward representatives from high subprime share districts. The
relative increase accelerates through 2006. The magnitude is economically significant: a one
standard deviation increase in the fraction of subprime borrowers in a given district leads
to an 80 percentage point increase in the growth of mortgage campaign contributions from
2002 to 2006. In contrast, we see no effect for non-mortgage financial industry campaign
This result demonstrates that the mortgage industry increasingly targeted representa-
tives of subprime borrowers during the subprime lending expansion. An obvious question in
light of this finding is: What precise votes are being bought with the money? One difficulty
in answering this question is the large number of bills that are related to subprime lend-
ing and the housing market: from the 103rd Congress (1993-1994) to the 110th Congress
(2007-2008), over 700 roll calls in the House alone were related to “affordable housing,”
“homeownership,” or “subprime” according to the Congressional Research Service.3One
of the prerequisites for analyzing the determinants of congressional voting behavior is that
the competing interests are well defined (Peltzman 1984). Unfortunately, it is difficult to
consistently define competing interests for such a large number of heterogenous bills.
In light of this difficulty, we adopt an alternative approach to examining voting patterns
on each single roll call. We aggregate all roll call votes for any legislation related to subprime
lending, affordable housing or homeownership, and we find that the predictive power of
mortgage campaign contributions on a representative’s voting behavior increases sharply
3Starting from the 111th Congress, CRS has moved to a new Subject Terms classification. According to
the Library of Congress “Terms assigned to legislation from the 110th and earlier Congresses came from a list
that was based upon a thesaurus known as the Legislative Indexing Vocabulary (LIV). CRS plans to convert
the LIV terms assigned to bills from the 93rd through the 110th Congresses to the new Subject terms as
time and resources permit.” We employ the terms “affordable housing,” “homeownership,” and “subprime”
under the old classification.
during the subprime mortgage credit expansion. More specifically, the fraction of votes for
which mortgage campaign contributions have an effect on voting patterns that is significantly
distinct from zero at the 95% confidence level increases from 3% in the 104th Congress (1995-
1996) to 20% in the 108th Congress (2003-2004). In contrast, over the same time period,
there is no discernible trend in the explanatory power of campaign contributions from the
non-mortgage financial sector.
However, the story is more complex than just subprime lenders buying government sup-
port for subprime lending. We also find a sharp increase in the statistical strength of con-
stituent interests in predicting votes on subprime lending related legislation. More specif-
ically, the fraction of subprime borrowers in a given representative’s congressional district
becomes a more powerful determinant for roll call votes on subprime legislation during the
subprime lending expansion. In the 105th Congress (1997-1998), the fraction of subprime
borrowers in a representative’s district significantly predicts the representative’s votes on
only 30% of roll calls; by the 108th Congress (2003-2004), it increases to 70%.
Taken together, these findings suggest that politicians responded to both special and
constituent interests when supporting policies related to the expansion of subprime lending.
In the final section of the study, we examine voting and cosponsorship patterns on six
bills for which competing interests are better defined than for most housing-related legis-
lation: The American Dream Downpayment Act of 2003 (ADDA) which aimed to increase
homeownership among low-income communities by providing downpayment and closing cost
assistance; the Ney-Kanjorski Responsible Lending Act of 2005 (RLA) which would have
preempted state regulations on predatory lending; the Prohibit Predatory Lending Act of
2005 (PPLA) which would have placed more stringent controls on subprime lenders; the
Mortgage Reform and Predatory Lending Act of 2007, which was a revised version of the
PPLA that eventually passed the House (but failed in the Senate); and the Federal Housing
Finance Reform Acts of 2005 and 2007, which sought to tighten regulation of Freddie Mac
and Fannie Mae. Our findings on the determinants of voting and cosponsorship patterns on