Handbook of the International Political Economy of Monetary Relations
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Handbook of the International Political Economy of Monetary Relations

  • Handbooks of Research on International Political Economy series

Edited by Thomas Oatley and W. Kindred Winecoff

This extensive Handbook provides an in-depth exploration of the political economy dynamics associated with the international monetary and financial systems. Leading experts offer a fresh take on research into the interaction between system structure, the self-interest of private firms, the political institutions within which governments make policy, and the ideas that influence beliefs about appropriate policy responses. Crucially they also assess how these factors have shaped the political economy of various facets of monetary and financial systems.
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Chapter 17: Why club goods proliferated in investment finance

W. Travis Selmier

Extract

The belief that financial markets are made up of private goods is a passionately held, near universal one. At best, this belief is incomplete; at worst, it is wrong and dangerous. This chapter presents an inductive argument explaining the proliferation of club goods in modern investment finance. I argue that this proliferation has occurred because investment banks create club goods and club good market structures in order to lower risk and increase financial return. In the past, club good structures defined the organizational nature of small merchant and investment banking partnerships. I argue that the disappearance of partnerships as an organizational structure pushed more club good structure into financial products (see Selmier 2013a, for more detail on this). Governance of financial markets assumes all financial products are private goods and does not take into account the presence of club goods. In order to retain dynamism in financial markets while lowering systemic risks, we must grasp the club goods nature of many financial products. To analyze this nature, I borrow from structural perspectives from the public choice and environmental economics literatures, which empower us with better governance ideas.

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