What do you currently work on? Please state the research question and what you expect to learn from your research.
I currently work on two related issues. One is understanding real effects of the diversification function of financial markets. Financialization of the economy has led to improved risk sharing, but at the same time to increased “common ownership” of many firms by the same investors and asset managers, including natural competitors. Theory and evidence indicates that common ownership affects strategic decisions of firms, and product market outcomes — including, in some cases, reduced competition. If diversification reduces competition, the possibility arises that an overly financialized economy plants the seeds of its own demise, by reducing competitiveness, macroeconomic growth, and increasing inequality.
The other issue concerns the political economy of central banking, in particular when central banks engage in large-scale purchases of public- and private-sector securities. Central banks thus socialize financial risks to future consumers and taxpayers, while at the same time paying interim short-term profits from these investments to the government. Those declared profits appear to be not only informed by economic realities but also by accounting choices. I try to understand to which extent these choices are meant to preserve central banks’ independence from the fiscal authorities and government, and to which extent they reflect a loss of such independence.
ECONtribute’s goal is to advance a new paradigm for the analysis of markets & public policy. In your mind, what are the key societal challenges? And how can economists answer to these?
I think the tension between financial risk sharing and competition is a first-order one, because it is directly linked to rising inequality: reduced competition reduces welfare, but it also increases the profits made by producers. Because the wealthiest fraction of the population holds a much greater share of producers than their share of consumption, reduced competition increases inequality.
Another development is that societies appear to increasingly rely on large asset managers to solve societal problems traditionally thought to be in the domain of government regulation, such as climate change and environmental regulation. That development also poses conceptual and practical challenges. One is that asset managers don’t have direct financial incentives to care about clean air, water, or mitigation of flooding and desertification in third-world countries or more generally in areas and population segments that don’t have influence over asset managers. Economists can help determine in which cases such an absence of proper incentives likely indicates that such societal challenges are better addressed by government intervention than by private sector self-regulation.
What are the implications of your own research for policymaking and/or for our understanding of society and the economy?
My research has had an influence on the reemergence of the notion that letting overlapping sets of investors own and control or influence entire industries might harm competition and welfare. Competition authorities worldwide have picked up on this research and in some cases used it in enforcement of existing competition law.