Abstract: This paper develops a theory that generates an equilibrium relationship between product complexity, transparency, and trust in firms. Complexity, transparency, and the evolution of trust are all endogenous, and equilibrium transparency is nonmonotonic. The least-trusted firms choose the lowest product complexity, remain opaque, and substitute ex ante third-party verification for information disclosure and trust. Firms with an intermediate level of trust choose an intermediate level of complexity and transparency through disclosure, with more trusted firms choosing greater complexity and lower transparency. The most-trusted firms choose maximum complexity while remaining opaque, eschewing both verification and disclosure.
Robert C. Merton's contributions are current. Regarding the design of retirement plans, in a framework of pension deficient systems, the investigations of Merton (1969) and (1971) on optimal consumption and portfolio rules during and after working life acquire contemporary validity. Likewise, Bodie and Merton (2002) propose the use of derivative products, at the international level, to diversify the risks of pension systems just at the moment when these systems of many underdeveloped and industrialized economies are on the verge of collapse; knowing that several of these systems only provide a meager proportion of the salary. Finally, Merton's theory of rational option pricing is retaken to create synthetic oil pipelines and power plants through the use of contingent claims. This paper aims to review the trends and perspectives in financial science and mathematical finance, within the framework of the pioneering contributions of Robert Cox Merton, highlighting priority areas that offer opportunities for research with social and global impacts.
By David Blair for the China Daily/European Weekly.
Nobel-winning economist Robert C. Merton says financial innovation is key to the future of Asia.
The financial crisis led to a loss of trust in providers, regulators, and financial innovation among consumers, Merton observes. Some have proposed technology can stand in for trust, but he says fintech cannot create trust or succeed without it. Two things, however, can substitute for trust: verification and transparency. Some forms of fintech can provide verification, but financial advice tends to be opaque rather than transparent. Merton also discusses data showing retail investors as less satisfied with cost disclosures and performance from active portfolio managers than institutional investors.
Slide presentation at the UMASS Center for International Securities and Derivatives Markets
Slide deck from presentation on New Developments in Long-Term Asset Management NBER meeting in London.
Slide deck from presentation, Derivatives: The State of the Art, at New York University.