Institutional Markets, Financial Marketing, and Financial Innovation



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    • Yale School of Organization and Management. I am grateful to Joel Demski, Phil Dybvig, Bengt Holmstrom, Jon Ingersoll, Offer Kella, and Richard Roll for helpful comments. Any errors are my own.


Firms and institutions are monitored and controlled through a complex set of implicit and explicit contractual relations. Because of these agency theoretic relations, institutional behavior in financial markets is not a simple reflection of the preference structures of individuals. Institutional preferences give rise to a demand for new financial instruments and innovations, even when the returns on these instruments are “spanned” in the sense of complete pricing. The innovations can be thought of as solving moral hazard problems. An agency theoretic example serves to illustrate the demand, supply, and financial marketing of stripped securities. In short, institutions matter.