Firms, names, and the organization of financial markets

• Main Author: Wang, Tianxi
• Published: London School of Economics and Political Science (University of London) 2009
• Subjects: 330.1; HB Economic Theory
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.550061

The thesis examines the nature of the organization, both as a whole and as a stage set up for the members to interact. Chapter One considers why and how an organization as a whole, represented by its name, holds reputation, like a natural person, even thought it, unlike the latter, has no fixed self, or “type” as called in economics. The chapter finds that having names hold reputations improves the economic efficiency; it also discovers two mechanisms that drive organizational reputation. Chapter Two considers the optimal allocation of ownership of physical capital. The effect of the allocation on control receives little attention in the literature and is the focus of the chapter. Control means here to affect the project choice of the agent, while incentive means the choice of ex ante human capital investment and ex post effort. The chapter finds that the principal ownership improves control, yet reduces incentive of the agent, compared to the agent ownership; thus the former, called “integration”, happens iff the benefit of coordination outweighs the loss in incentive. Chapter Three provides a new angle of delineating the boundary of the firm, by the allocation of the liability to investors. In a Towsend economy, it examine all modes of financing, each defined by the according allocation of the liability; particularly, Financial intermediation (FI) is defined by the fact the monitor alone takes the liability. The real race is between FI and Conglomeration, where the entrepreneurs and the monitor form a conglomerate to take the liability. FI has “Number Advantage”: when default is declared, the investors audit one bank asset under FI but many entrepreneur projects under conglomerate. Conglomeration has “Collateral Advantage”: its collateral is the pool of the projects contains as a part the bank asset, the collateral of FI. Both FI and Conglomeration implement the benefit of diversification; indeed, under the perfect diversification, Conglomeration is as good as FI. The chapter thus challenges the view that the benefit of diversification drives Financial Intermediation (FI), a view first established by Diamond (1984) and well accepted by the literature.