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Paul Woolley Center for the Study of Capital Market Dysfunctionality
This is a center that has been established within the Financial
Markets Group, with the generous support of Paul Woolley, the former Chairman
of GMO Europe. Paul is involved in the center's research and I am the center's
director.
Research at the center aims at understanding the workings of capital markets
and the social efficiency of allocations these markets achieve. The research
departs from the Arrow-Debreu view of frictionless markets, and emphasizes
the role of financial institutions (e.g. investment banks, mutual, hedge, and
pension funds) in influencing prices and allocations. The main themes are:
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Contracts and organizational structure:
What contracts should govern the agency relationship between investors and fund managers?
How do contracts influence managers' investment policies? What determines the
organizational structure of the fund-management industry?
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Market frictions and asset prices:
How do frictions such as asymmetric information, market-entry costs, or agency,
impact the informational efficiency of prices? What are the implications
for market liquidity and for phenomena such as excess volatility or contagion?
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Allocative efficiency and the macro-economy:
Frictions can generate allocative inefficiencies, such as imperfect risksharing
and misallocation of capital in the macroeconomy. How important are these inefficiencies
and how can they be measured?
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Policy implications:
Can regulatory policies mitigate market inefficiencies? For example, can changes in
contracts between investors and managers, or the introduction of new
assets, generate Pareto-improvements?
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