Legal Protection in Retail Financial Markets

Given the importance of sound advice in retail financial markets and the fact that financial institutions outsource their advice services, what legal rules maximize social welfare in the market? We address this question by posing a theoretical model of retail markets in which a firm and a broker face a bilateral hidden action problem when they service clients in the market. All participants in the market are rational, and prices are set based on consistent beliefs about equilibrium actions of the firm and the broker. We characterize the optimal law within our modeling context, and derive how the legal system splits the blame between parties to the transaction. We also analyze how complexity in assessing clients and conflicts of interest affect the law. Since these markets are large, the implications of the analysis have great welfare import.

When Does Libertarian Paternalism Work?

We develop a theoretical model to study the effects of libertarian paternalism on knowledge acquisition and social learning. Individuals in our model are permitted to appreciate and use the information content in the default options set by the government. We show that in some settings libertarian paternalism may decrease welfare because default options slow information aggregation in the market. We also analyze what happens when the government acquires imprecise information about individuals, and characterize its incentives to avoid full disclosure of its information to the market, even when it has perfect information. Finally, we consider a market in which individuals can sell their information to others and show that the presence of default options causes the quality of advice to decrease, which may lower social welfare.

Rationing in IPOs

We provide a model of bookbuilding in IPOs, in which the issuer can choose to ration shares. We consider two allocation rules. Under share dispersion, before informed investors submit their bids, they know that, in the aggregate, winning bidders will receive only a fraction of their demand. We demonstrate that this mitigates the winner’s curse, that is, the incentive of bidders to shade their bids. It leads to more aggressive bidding, to the extent that rationing can be revenue-enhancing. In a parametric example, we characterize bid and revenue functions, and the optimal degree of rationing. We show that, when investors’ information is diffuse, maximal rationing is optimal. Conversely, when their information is concentrated, the seller should not ration shares. We determine the optimal degree of rationing in a class of credible mechanisms. Our model reconciles the documented anomaly that higher bidders in IPOs do not necessarily receive higher allocations.IPOs

Newsletter / House of Finance, Goethe-Universität Frankfurt 3/12

Parallel Banking – Frankfurt Can Bring some Light into the Darkness_3 THOMAS SCHÄFER Inflation and Growth: New Evidence from a Dynamic Panel Threshold Analysis_4 ALEXANDER BICK | STEPHANIE KREMER | DIETER NAUTZ Who Benefits from Building Insurance Groups?_6 SEBASTIAN SCHLÜTTER | HELMUT GRÜNDL IT Innovation: Mindfully Resisting the Bandwagon_8 ROMAN BECK | WOLFGANG KÖNIG | IMMANUEL PAHLKE | MARTIN WOLF “The Part-Time Master in Finance is GBS' Answer to the Bologna Process”_10 UWE WALZ House of Finance Wins New LOEWE Center_1

Summary of workshop on recent developments in consumer credit and payments

On September 24-25, 2009, the Research Department and the Payment Cards Center of the Federal Reserve Bank of Philadelphia held their fifth joint conference to present and discuss the latest research on consumer credit and payments. Sixty participants attended the conference, which included seven research papers on topics such as securitization and distressed loan renegotiation, consumer disclosure, data breaches and identity theft, and the effects of the U.S. financial crisis on global retail lending. In this article, Mitchell Berlin summarizes the papers presented at the conference.Mortgage loans ; Foreclosure ; Payday loans ; Identity theft ; Consumer protection ; Bank loans

Framing Address: A Framework for Analyzing Financial Market Transformation

The title of this Symposium originally was “Rethinking Financial and Securities Markets.” It is, of course, somewhat presumptuous for scholars to try to rethink financial markets per se. Markets, including financial markets, are driven primarily by supply and demand. But scholars can and should try to influence the future of financial markets by rethinking their fundamental aspects. This Symposium presents work from leading scholars in the fields of law, economics, finance, and accounting. I will try to frame the discussion from the perspectives of these four disciplines. First, however, we need to identify what it is about financial markets that is worth rethinking. I will focus on ways in which financial markets have been changing. They are increasingly decentralized and fragmented. They are increasingly direct sources of firm capital—a process called disintermediation. They are increasingly global. They are increasingly creating funding mismatches, as short-term securities are used to finance long-term capital needs. And they (as well as financial market products) are increasingly complex and obscure to market participants, even with full disclosure. I will refer to these “financial market changes” throughout my talk