IDEAS home Printed from https://ideas.repec.org/a/kap/regeco/v49y2016i1p56-85.html
   My bibliography  Save this article

Endogenous transactions costs and institutions in the 2007/08 financial crisis

Author

Listed:
  • Jamus Jerome Lim

    ()

  • Terence Tan

Abstract

This paper examines the manner by which transactions costs in financial markets, broadly defined, not only derive from the regulatory-institutional framework, but in turn affect the development of this framework. We develop a simple model of policymaking with common agency that embeds endogenous transactions costs and institutions, so that the two are allowed to influence each other over time. Our approach seeks to go beyond attributing the crisis to either complex finance or regulatory/government failures, since such explanations generate necessary but not sufficient conditions for a financial crisis. Instead, we focus on the central role of rising transactions costs. We document the increasing presence of such costs in the U.S. financial sector since 1980, along with how changes in transactions costs coevolved with regulatory and institutional innovations over the past 30 years. We argue that such transactions costs amplified an ever-greater disconnect between market prices and their economic fundamentals, and increased financial fragility to the point that the system became vulnerable to the 2007/08 financial crisis. Copyright Springer Science+Business Media New York 2016

Suggested Citation

  • Jamus Jerome Lim & Terence Tan, 2016. "Endogenous transactions costs and institutions in the 2007/08 financial crisis," Journal of Regulatory Economics, Springer, vol. 49(1), pages 56-85, February.
  • Handle: RePEc:kap:regeco:v:49:y:2016:i:1:p:56-85
    DOI: 10.1007/s11149-015-9282-2
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11149-015-9282-2
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    Financial crisis; Transactions costs; Endogenous regulatory institutions; D23; F34; G01;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G01 - Financial Economics - - General - - - Financial Crises

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:regeco:v:49:y:2016:i:1:p:56-85. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Springer Nature Abstracting and Indexing). General contact details of provider: http://www.springer.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.