A legal theory of finance

•An inductive theory of finance.•Financial markets are legally constructed.•Law can cause financial market collapse.•Financial markets are neither private nor public but essentially hybrid.•At the apex of the system law is elastic and power becomes salient. This paper develops the building blocks fo...

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Bibliographic Details
Published in:Journal of Comparative Economics 2013-05, Vol.41 (2), p.315-330
Main Author: Pistor, Katharina
Format: Article
Language:English
Subjects:
Securities markets
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Summary:•An inductive theory of finance.•Financial markets are legally constructed.•Law can cause financial market collapse.•Financial markets are neither private nor public but essentially hybrid.•At the apex of the system law is elastic and power becomes salient. This paper develops the building blocks for a legal theory of finance. LTF holds that financial markets are legally constructed and as such occupy an essentially hybrid place between state and market, public and private. At the same time, financial markets exhibit dynamics that frequently put them in direct tension with commitments enshrined in law or contracts. This is the case especially in times of financial crisis when the full enforcement of legal commitments would result in the self-destruction of the financial system. This law-finance paradox tends to be resolved by suspending the full force of law where the survival of the system is at stake; that is, at its apex. It is here that power becomes salient.
ISSN:0147-5967
1095-7227
DOI:10.1016/j.jce.2013.03.003