TILEC Work In Progress: Konrad Borowicz
The Industrial Organization of Financial Markets: An Analytical Framework for Policymakers
This paper proposes an analytical framework designed to ensure that considerations of industrial organization are taken into account by policymakers who set policy for financial markets. Considerations of industrial organization in general concern the impact of the choice of ways of organizing transactions on outcomes, including in particular transaction costs. While it is apparent that some ways of organizing transactions have a greater impact on the reduction of transaction costs, the ways of organizing transactions that have a lesser impact often persist longer than necessary resulting in a significant loss of welfare, not least because of risks to financial stability they entail. The framework posits that to ensure that considerations of industrial organization are taken into account by policymakers who set policy for financial markets, policymakers should, apart from traditional regulatory considerations, such as informational efficiency, examine all financial markets by scrutinizing 1) the role of non-profit organizations in organizing transactions, 2) the governance and membership in those organizations and 3) competition in those markets.