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The Self-regulatory Mechanism Of Financial Institutions Under Game Theory

Posted on:2005-03-23Degree:MasterType:Thesis
Country:ChinaCandidate:Y YuanFull Text:PDF
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The financial sector is the core of modern economy. The soundness and development of the financial sector plays an important role in the soundness and prosperity of the economy. There are two ways to achieve the soundness of the financial sector. One is the self-regulation of financial institutions. The other is the regulation of financial regulatory authorities. Which one is more important between self-regulation and regulation has long been a hot topic in the field of finance. The self-regulation of financial institutions is ideal for the efficiency of the market economy. While in realty, the weakness of self-regulation of financial institutions often induces the intervention and reinforcement of financial regulation.Under what conditions can financial institutions be self-regulated? What is the incentive compatible constraint for self-regulation of financial institutions? What is the relationship between regulation and self-regulation? These should be answered theoretically. Also, these are the questions to which the financial regulatory authority of China would be eager to find the answers.By considering the reputation mechanism, the regulative determent mechanism and the internal incentive-constraint mechanism altogether, and given the separation of ownership right and control right, an incomplete information dynamic game model for self-regulation of financial institutions is developed. Using cost-benefit analysis and marginal analysis, the theme of self-regulation is discussed theoretically.In the first Chapter, the history of self-regulation and regulation of the financial sector is reviewed, thus the theoretical and practical value of the theme of this paper is noted. After the article review, the innovative point of this paper is presented and the focus of this paper is confined.In Chapter Two, under the assumption of owner as manager, a game model of solo market reputation mechanism is developed. Next, by introducing the financial regulator into the model, a game model of reputation mechanism under regulative determent is developed. Thus the weakness of solo market reputation mechanism and the advantage of regulative determent are shown.In Chapter Three, by introducing the concept of ownership right and controlright separation, a one way transmitted game model of regulative determent mechanism and reputation mechanism is developed on the models of Chapter Two. Next, the regulative determent mechanism and the reputation mechanism directly burdening on the management are introduced into the model. Thus a two way transmitted game model is developed, with such following conclusions as the decision of self-regulation is the discretion of the opportunistic management, the restrictive mechanisms can substitute each other, the restrictive mechanisms burdening directly on the management are more effective, and etc.In Chapter Four, the models developed in Chapter Two and Three are elaborated. The structure of the game is explained. The disadvantages of the one way transmitted model and the advantages of the two way transmitted model are discussed. Then the rule for settling regulatory focuses is found, as the responsibility shared between the shareholder and the management should match the control right shared between the same group. Given the large discrepancy between the residual claim right sharing and control right sharing, burdening more responsibility on the management ought to be the best way to enhance the self-regulatory momentum of financial institutions.Chapter Five does some case studies on recent trends in western financial sector after 1990s, thus some of the conclusions in the former chapters are testified.In the last Chapter, the weaknesses of the conditions for self-regulation of financial institutions in China are discussed. And suggestions are made to regulators on how to improve the self-regulatory mechanism of financial institutions in China.
Keywords/Search Tags:Financial Regulation, Financial Institution, Self-regulation, Reputation, Game Theory
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