Abstract
Financial innovation has been both praised as the engine of growth of society and castigated for being the source of the weakness of the economy. In this article, we review the literature on financial innovation and highlight the similarities and differences between financial innovation and other forms of innovation. We also propose a research agenda to systematically address the social welfare implications of financial innovation. To complement existing empirical and theoretical methods, we propose that scholars examine case studies of systemic (widely adopted) innovations, explicitly considering counterfactual histories had the innovations never been invented or adopted.
*This is forthcoming as a chapter, “The Consequences of Financial Innovation: A Counterfactual Research Agenda” by Josh Lerner and Peter Tufano, in The Rate and Direction of Inventive Activity Revisited, edited by Josh Lerner and Stern Stern, to be published by the University of Chicago Press for the National Bureau of Economic Research. Copyright © National Bureau of Economic Research.
