Regulatory Uncertainty and FinTech Innovation

53 Pages Posted: 25 Jun 2024

See all articles by Lin William Cong

Lin William Cong

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

Murillo Campello

University of Florida - Warrington College of Business Administration; National Bureau of Economic Research (NBER)

Diemo Dietrich

University of Greifswald - Department of Economics

Date Written: April 02, 2024

Abstract

Regulatory uncertainty is prominent in FinTech. Regulators lack experience in assessing the private and societal value of FinTech innovation, with instruments at their disposal being crude and underdeveloped. We advance a theory where FinTech innovators, incumbent firms, and regulators strategically respond to opportunities to innovate under uncertainty. In it, regulators acquire costly information about the value of innovation while FinTechs face regulatory uncertainty. We characterize how the rate of innovation in FinTech depends on the budget and skills of the regulator in assessing the gains and risks to innovation, the private rents that accrue to innovators, and the number of FinTechs with access to new technology. Multiple equilibria arise from the complementarity between regulatory preparedness/competence and investments into innovation, adding extrinsic risks to the regulation-innovation game. Among several policy implications, our theory shows that ample regulatory budgets prompt FinTechs to innovate more.

Keywords: Extrinsic Risk, Financial Innovation, Regulation, Incomplete Information

Suggested Citation

Cong, Lin and Campello, Murillo and Dietrich, Diemo, Regulatory Uncertainty and FinTech Innovation (April 02, 2024). FEB-RN Research Paper No. 15/2024, Available at SSRN: https://ssrn.com/abstract=4867378 or http://dx.doi.org/10.2139/ssrn.4867378

Lin Cong

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Murillo Campello

University of Florida - Warrington College of Business Administration ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138

Diemo Dietrich (Contact Author)

University of Greifswald - Department of Economics ( email )

Friedrich-Loeffler-Strasse 70
D-17487 Greifswald
Germany

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