Developer's Expertise and the Dynamics of Financial Innovation: Theory and Evidence
Instituto Tecnológico Autónomo de México (ITAM) - Centro de Investigacion Economica
Enrique J. Schroth
Cass Business School
October 31, 2004
We study product innovation and imitation in the market of corporate underwriting with a dynamic model where client switching costs and the bankers' expertise in deal structuring characterize the life cycle of a security. While the clientele loyalty allows positive rent extraction, the superior expertise can account for the documented market leadership of the innovator. As expertise on product structuring is acquired by imitators, the innovator's market share advantage decreases. Also, the speed of entry by imitators increases for later generation products. Our predictions are consistent with well documented evidence on the market share leadership of innovators. We also present new evidence from equity-linked and derivative corporate products that supports the dynamic predictions of our learning model.
Number of Pages in PDF File: 46
Keywords: Innovation and imitation, first-mover advantages, product differentiation, learning
JEL Classification: G24, L12, L89working papers series
Date posted: March 18, 2005
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