The Disadvantages of Financial Innovation

Abstract

This chapter asks why these assets have not already been invented. The answer seems to lie in the lack of incentives for financial innovation, the fact that many of the benefits of issue are externalities, and the likely existence not only of a novelty premium that would have to be paid by the first issuers, but also the fact that the pioneers would have to reckon on a lack of competition to keeping premia down. The latter two factors imply that, even for an advanced country that could expect to benefit in the long run, the optimal strategy may be to avoid giving a lead.