Tianxi Wang
Bio sketch:
Tianxi Wang joined the Department in September 2007. Tianxi’s first degree was in Materials Science, following which he completed a master’s degree in mathematics, after which he became a research student in economics at the London School of Economics. Tianxi’s research interests are in contract theory and its applications, and in the organisation of financial markets.
Abstract:
This paper first presents a new approach to examine the leverage of financial intermediaries. It is driven by differing risk preferences and captures two features: Debt serves to boost the return of equity, and equity to safe net debt. Then the paper shows, for the first time, that if unregulated, financial intermediaries are leveraged over the social best level. The market failure is fixed by proper capital adequacy regulation. The regulation raises the profit of the finance sector as a whole, but individual financial intermediaries have incentive to circumvent the regulation.
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