Regulation of Financial Innovation Stability vs. Progress?

32 Pages Posted: 21 Apr 2016

See all articles by Daniel Blochinger

Daniel Blochinger

Ulm University - Institute of Economics

Date Written: April 19, 2016

Abstract

This paper analyzes the impact of financial regulation on the process of financial innovation. We use a discrete investment choice model to examine the potential trade-off between a more innovative and a more stable financial system, which regulators might face when intervening in the process of financial innovation. While the trade-off holds in a simple setting, it can break when inefficiencies are added into the model. We find clumping behavior and preemptive moves as two examples of inefficiencies that break the trade-off. Regulators can combat those inefficiencies and thereby improve both innovativeness and stability at the same time.

Keywords: Financial Innovation, Financial Regulation, Equity Requirements, Growth, Instability

JEL Classification: G28, O31, O43, D60

Suggested Citation

Blochinger, Daniel, Regulation of Financial Innovation Stability vs. Progress? (April 19, 2016). Available at SSRN: https://ssrn.com/abstract=2766919 or http://dx.doi.org/10.2139/ssrn.2766919

Daniel Blochinger (Contact Author)

Ulm University - Institute of Economics ( email )

Helmholtzstraße 16
Ulm, 89081
Germany

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