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- Title
The Process of Financial Innovation.
- Authors
Silber, William L.
- Abstract
The objective of this paper is to survey recent financial innovations and to provide a framework for understanding why they arose. Models are designed to explain the process of financial innovation and are used to identify the variables that underlie new financial products and practices. New financial instruments or practices are innovated to lessen the financial constraints imposed, on firms. A simple linear programming model helps to articulate the process. Constraint-induced model of financial innovation fully explained new bank products during the 1952-70 observation period. The constraint model underlies about 60 percent of the financial innovations during the 1970-82 period. In this paper financial innovation is compared with technological change. Both types of activity respond to economic incentives. Both processes also improve economic welfare. Technological change expands physical output, thereby increasing the standard of living. In particular, innovations in financial institutions and practices have improved the ability to bear risk, lowered transaction costs, and circumvented outmoded regulations.
- Subjects
CORPORATE finance; FINANCE; MONETARY incentives; TECHNOLOGICAL innovations; TRANSACTION costs; COST of living; FINANCIAL institutions; LINEAR programming
- Publication
American Economic Review, 1983, Vol 73, Issue 2, p89
- ISSN
0002-8282
- Publication type
Article