Abstract
Social investing will be examined as an example of modern institutional innovations with respect to the complexity of financial markets. Social impact bonds will be used as a case study of a particular innovative financial instrument in order to understand the complexity and resulting challenges of these potential market dynamics. The author argues that post-crisis regulatory regime governing US and European markets require substantial work to fully address the challenges derived from financial innovations. In particular, existing regulation, technologies, information asymmetry, agency cost, and innovation pace need to be considered in order to understand the factors which will determine likely outcomes of social impact bonds. Social Investing and the embryonic stage of current development reflect certain 'unknown areas'. This paper addresses the needs of the post-embryonic stage of the theoretical framework of financial market innovations.
Highlights
Financial market complexity has led to innovations such as social impact bonds (SIB(s)) which themselves add to the complexity of financial markets
Modern finance theory is based on three primary assumptions: 1) Perfect information 2) the absence of transaction costs 3) rational market participants
Norfund is a public institution established as a Development Finance Institution (DFI) which was established by the Norwegian Parliament in 1997
Summary
Financial market complexity has led to innovations such as social impact bonds (SIB(s)) which themselves add to the complexity of financial markets. To understand the relationships between these innovative instruments, complexity itself must be examined in the context of today’s financial markets. The author examines financial market complexity, innovation in the form of the SIB and its short history, and suggests that these phenomena will require methods of study which are as new and innovative as the instruments and the environment they operate in
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