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Zhaohui Chen – McIntire – Brown Bag Series
28 September @ 1:45 pm - 2:45 pm
Zhaohui Chen, Alan Morrisson, and William Wilhelm
We present a model in which a long-lived bank endogenously learns about the environment for ﬁnancial innovation through experimentation on its clients. When the bank has superior knowledge of the state of the world facing its clients, it may engage in ineﬃcient or “reckless” experimentation because it cannot commit to do otherwise. We show that strong client relationships can mitigate the incentive to pitch innovative products to clients for whom they are not appropriate. We also explore the limits of internal monitoring systems intended to prevent such behavior. Finally, we show that greater banker mobility can complement monitoring systems because bankers will have incentive to visibly seek out weak monitoring environments only when the expected collective beneﬁts from ﬁnancial innovation are especially large.