Why are Financial Markets so Inefficient and Exploitative, And a Suggested Remedy (Por Qué Los Mercados Financieros son Tan Ineficientes y Explotadores, Y Una Propuesta de Solución) (Spanish)

Revista de Economía Institucional, Vol. 12, No. 23, p. 55, 2010

29 Pages Posted: 13 Dec 2010

See all articles by Paul Woolley

Paul Woolley

London School of Economics & Political Science (LSE)

Date Written: December 1, 2010

Abstract

The essay offers a new understanding of how financial markets work. The key departure from conventional theory is to recognize that investors do not invest directly in securities but through agents such as fund managers. Agents have better information and different objectives than their customers (principals) and this asymmetry is shown as the source of inefficiency: mispricing, bubbles and crashes. A separate outcome is that agents are in a position to capture for themselves the bulk of the returns from financial innovations. Principal/agent problems do a good job of explaining how the global finance sector has become so bloated, profitable and prone to crisis. Remedial action involves the principals changing the way they contract with, and instruct agents. The essay ends with a manifesto of policies that pension funds and other large investors can adopt to mitigate the destructive features of delegation both for their individual benefit and to promote social welfare in the form of a leaner, more efficient and more stable finance sector.

Note: Downloadable document is in Spanish.

Keywords: Financial Markets, Principal-Agent

JEL Classification: G11, G14, D82

Suggested Citation

Woolley, Paul, Why are Financial Markets so Inefficient and Exploitative, And a Suggested Remedy (Por Qué Los Mercados Financieros son Tan Ineficientes y Explotadores, Y Una Propuesta de Solución) (Spanish) (December 1, 2010). Revista de Economía Institucional, Vol. 12, No. 23, p. 55, 2010, Available at SSRN: https://ssrn.com/abstract=1724772

Paul Woolley (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
44-20-7955-7477 (Phone)

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