Abstract

http://ssrn.com/abstract=2010606
 
 

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An FDA for Financial Innovation: Applying the Insurable Interest Doctrine to 21st Century Financial Markets


Eric A. Posner


University of Chicago - Law School

E. Glen Weyl


Microsoft Research New England; University of Chicago

June 4, 2012

Northwestern University Law Review, Vol. 107, Forthcoming
University of Chicago Institute for Law & Economics Olin Research Paper No. 589
U of Chicago, Public Law Working Paper No. 382

Abstract:     
The financial crisis of 2008 was caused in part by speculative investment in complex derivatives. In enacting the Dodd-Frank Act, Congress sought to address the problem of speculative investment, but merely transferred that authority to various agencies, which have not yet found a solution. We propose that when firms invent new financial products, they be forbidden to sell them until they receive approval from a government agency designed along the lines of the FDA, which screens pharmaceutical innovations. The agency would approve financial products if they satisfy a test for social utility that focuses on whether the product will likely be used more often for insurance than for gambling. Other factors may be addressed if the answer is ambiguous. This approach would revive and make quantitatively precise the common-law insurable interest doctrine, which helped control financial gambling before deregulation in the 1990s.

Number of Pages in PDF File: 56

Keywords: gambling, insurance, pre-approval regulation, financial regulation

JEL Classification: D63, G28, K22

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Date posted: February 25, 2012 ; Last revised: July 30, 2013

Suggested Citation

Posner, Eric A. and Weyl, E. Glen, An FDA for Financial Innovation: Applying the Insurable Interest Doctrine to 21st Century Financial Markets (June 4, 2012). Northwestern University Law Review, Vol. 107, Forthcoming; University of Chicago Institute for Law & Economics Olin Research Paper No. 589; U of Chicago, Public Law Working Paper No. 382. Available at SSRN: http://ssrn.com/abstract=2010606 or http://dx.doi.org/10.2139/ssrn.2010606

Contact Information

Eric A. Posner
University of Chicago - Law School ( email )
1111 E. 60th St.
Chicago, IL 60637
United States
773-702-0425 (Phone)
773-702-0730 (Fax)
HOME PAGE: http://www.law.uchicago.edu/faculty/posner-e/
Eric Glen Weyl (Contact Author)
Microsoft Research New England ( email )
One Memorial Drive, 14th Floor
Cambridge, MA 02142
United States
(857) 998-4513 (Phone)
HOME PAGE: http://www.glenweyl.com
University of Chicago ( email )
1126 East 59th Street
Chicago, IL 60637
United States
(773) 702-4862 (Phone)
(773) 702-8490 (Fax)
HOME PAGE: http://www.glenweyl.com
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