Edited by Thomas Oatley and W. Kindred Winecoff
Chapter 17: Why club goods proliferated in investment finance
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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