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

56 Pages Posted: 25 Feb 2012 Last revised: 30 Jul 2013

Eric A. Posner

University of Chicago - Law School

E. Glen Weyl

Microsoft Research; Yale University

Date Written: June 4, 2012

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.

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

JEL Classification: D63, G28, K22

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: https://ssrn.com/abstract=2010606 or http://dx.doi.org/10.2139/ssrn.2010606

Eric A. Posner

University of Chicago - Law School ( email )

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HOME PAGE: http://www.law.uchicago.edu/faculty/posner-e/

Eric Glen Weyl (Contact Author)

Microsoft Research ( email )

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HOME PAGE: http://www.glenweyl.com

Yale University ( email )

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United States

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