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Developer's Expertise and the Dynamics of Financial Innovation: Theory and Evidence

Author

Listed:
  • Helios Herrera

    (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))

  • Enrique Schroth

    (HEC Lausanne)

Abstract

We study product innovation and imitation in the market of corporate underwriting with a dynamic model where client switching costs and the bankers' expertise in deal structuring characterize the life cycle of a security. While the clientele loyalty allows positive rent extraction, the superior expertise can account for the documented market leadership of the innovator. As expertise on product structuring is acquired by imitators, the innovator's market share advantage decreases. Also, the speed of entry by imitators increases for later generation products. Our predictions are consistent with well documented evidence on the market share leadership of innovators. We also present new evidence from equity-linked and derivative corporate products that supports the dynamic predictions of our learning model.

Suggested Citation

  • Helios Herrera & Enrique Schroth, 2005. "Developer's Expertise and the Dynamics of Financial Innovation: Theory and Evidence," Working Papers 0504, Centro de Investigacion Economica, ITAM.
    • Handle: RePEc:cie:wpaper:0504
    as

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    References listed on IDEAS

    as
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    11. Enrique Schroth, 2006. "Innovation, Differentiation, and the Choice of an Underwriter: Evidence from Equity-Linked Securities," The Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 1041-1080.
    12. Enrique Schroth, 2002. "Innovation and First-Mover Advantages in Corporate Underwriting: Evidence from Equity Linked Securities," FAME Research Paper Series rp74, International Center for Financial Asset Management and Engineering.
    13. Bhattacharyya, Sugato & Nanda, Vikram, 2000. "Client Discretion, Switching Costs, and Financial Innovation," The Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 1101-1127.
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    Cited by:

    1. Boldrin, Michele & Levine, David K., 2008. "Perfectly competitive innovation," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 435-453, April.

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    More about this item

    Keywords

    Innovation and imitation; first-mover advantages; learning;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L89 - Industrial Organization - - Industry Studies: Services - - - Other

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