Developer's Expertise and Dynamicsof Financial Innovation: Theory and Evidence

Helios Herrera () and Enrique Schroth ()

FAME Research Paper Series from International Center for Financial Asset Management and Engineering

Abstract: We study product innovation and imitation in the market of corporate underwriting with a dynamic model where client switching costs and the bankers’ expertise in deal structuring characterize the life cycle of a security. While the clientele loyalty allows positive rent extraction, the superior expertise can account for the documented market leadership of the innovator. As expertise on product structuring is acquired by imitators, the innovator’s market share advantage decreases. Also, the speed of entry by imitators increases for later generation products. Our predictions are consistent with well documented evidence on the market share leadership of innovators. We also present new evidence from equity-linked and derivative corporate products that supports the dynamic predictions of our learning model.

Keywords: Innovation and imitation; first-mover advantages; product differentiation; learning (search for similar items in EconPapers)
JEL-codes: G24 L12 L89 (search for similar items in EconPapers)
Date: 2004-10
New Economics Papers: this item is included in nep-fin
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Developer's Expertise and the Dynamics of Financial Innovation: Theory and Evidence (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:fam:rpseri:rp124

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