Financial Industry Dynamics

Richard Lowery and Tim Landvoigt
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Richard Lowery: University of Texas, Austin
Tim Landvoigt: The University of Texas at Austin

No 1248, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: To explain the sources of heterogeneity and fragility in the financial sector, we develop a dynamic model of entry, exit, and firm quality in the market for issuance and trading of complex financial securities. Firm quality has two dimensions; security production expertise, which creates a positive externality for other firms, and trading expertise, which allows firms to obtain more favorable prices when trading with other firms. We find that increasing the quality of securities, which in the model increases the scope for investment in trading expertise, leads to markets that exhibit greater concentration, firm heterogeneity, fragility, and price dispersion.

Date: 2016
New Economics Papers: this item is included in nep-bec, nep-com and nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:1248

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