From Fragmentation towards Innovation, the Application of Institutionalism towards Financial Market Theories

Abstract

Financial markets in less developed countries suffer from financial dualism, a situation in which a large informal sector coexists alongside a formal one. Contemporary financial market theories are not able to incorporate an understanding of the informal sector and are, therefore, only applicable to the formal system which is unsatisfying. With over 80 percent of the worlds population relying on informal financial arrangement (World Bank 2001), financial informality is not just a small exception. The intention of this dissertation is to show that financial market theories can never be applicable without considering OIE mechanisms. The reasoning is not only limited to informal/formal institutions in less developed countries, but also to developed countries.While politicians often argue that financial market fragmentation in less developed countries is caused by inefficient formal institutions, fragmentation in developed countries is caused by too efficient formal institutions. In this sense, the relevance of a financial market theory solely focusing on efficiency becomes questionable. The intention is to show that NIEOIE is not only a theoretical experiment, rather it builds the theoretical foundation for future financial market theories.