Essays in Banking and Corporate Finance

Abstract

This dissertation studies the role of different types of frictions in preventing optimal resource allocation in the economy. In chapter 1, I focus on financial frictions and consider the distorted incentives of banks to lend to zombie firms. I show that bank supervision, in the form of on-site unexpected inspections, can reduce the misallocation of resources in the credit market with positive spillovers for the local economy. In chapter 2, I study the role of political frictions in explaining the divergence of the income-GDP ratio from the optimal level suggested by the optimal taxation literature. I review the literature on the topic and suggest that among other factors, political budget cycles play an important role. In chapter 3, I combine the two topics from before, by considering the role of political frictions in the context of zombie lending and show that electoral cycles can explain the persistence of this lending behavior by financial intermediaries.