Abstract

http://ssrn.com/abstract=680825
 
 

Citations



 


 



Design of Financial Systems: Towards a Syntheses of Function and Structure


Zvi Bodie


Boston University - Department of Finance & Economics

Robert C. Merton


MIT Sloan School of Management; National Bureau of Economic Research (NBER); Harvard Business School - Finance Unit


Journal of Investment Management, Vol. 3, No. 1, First Quarter 2005

Abstract:     
This paper proposes a functional approach to designing and managing the financial systems of countries, regions, firms, households, and other entities. It is a synthesis of the neoclassical, neo-institutional, and behavioral perspectives. Neoclassical theory is an ideal driver to link science and global practice in finance because its prescriptions are robust across time and geopolitical borders. By itself, however, neoclassical theory provides little prescription or prediction of the institutional structure of financial systems - that is, the specific kinds of financial intermediaries, markets, and regulatory bodies that will or should evolve in response to underlying changes in technology, politics, demographics, and cultural norms. The neoclassical model therefore offers important, but incomplete, guidance to decision makers seeking to understand and manage the process of institutional change. In accomplishing this task, the neo-institutional and behavioral perspectives can be very useful. In this proposed synthesis of the three approaches, functional and structural finance (FSF), institutional structure is endogenous. When particular transaction costs or behavioral patterns produce large departures from the predictions of the ideal frictionless neoclassical equilibrium for a given institutional structure, new institutions tend to develop that partially offset the resulting inefficiencies. In the longer run, after institutional structures have had time to fully develop, the predictions of the neoclassical model will be approximately valid for asset prices and resource allocations. Through a series of examples, the paper sets out the reasoning behind the FSF synthesis and illustrates its application.

Keywords: Financial system, financial structure, risk management

JEL Classification: G0

Accepted Paper Series





Not Available For Download

Date posted: April 1, 2005  

Suggested Citation

Bodie, Zvi and Merton, Robert C., Design of Financial Systems: Towards a Syntheses of Function and Structure. Journal of Investment Management, Vol. 3, No. 1, First Quarter 2005. Available at SSRN: http://ssrn.com/abstract=680825

Contact Information

Zvi Bodie
Boston University - Department of Finance & Economics ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-4160 (Phone)
617-353 6667 (Fax)
HOME PAGE: http://smgnet.bu.edu/mgmt/profiles/BodieZvi.html
Robert C. Merton (Contact Author)
MIT Sloan School of Management ( email )
77 Massachusetts Avenue
E62-634
Cambridge, MA 02139-4307
United States
617 715 4866 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Harvard Business School - Finance Unit ( email )
Boston, MA 02163
United States
617-495-6678 (Phone)
Feedback to SSRN


Paper statistics
Abstract Views: 978

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo7 in 0.235 seconds