Nobel Research Tackles 'Too Big To Fail' Quandary
The Nobel Prize for Economics to Oliver Williamson comes at an opportune time.
His work examines the efficiency of large firms at a time when regulators are considering limits on how large financial institutions should get. Striking the balance between the benefits that large companies bring to the economy and the risks they create by virtue of their size is the core challenge in devising financial regulation in the post−crisis world.
The conundrum has been hotly debated ever since last year's credit market collapse when the government rescued some companies and allowed others to fail. Most recently, the Financial Stability Board, a global body tasked by the Group of 20 developing and industrialized nations to develop international banking regulation, acknowledged the "deep−seated challenges" such large institutions pose and committed to developing solutions in the next 12 months. Some central bankers are clearly coming down on the side of size limits; Bank of England monetary policy committee member Adam Posen was the latest to weigh in on the topic Tuesday.
Size can also limit accountability: A recent paper by two economists at the Polytechnic Institute of New York University points out companies can become so large that destructive behavior − such as rogue trading − becomes hard to detect.
Williamson's work acknowledges large companies can use their heft for questionable ends. "Large lobbying and exhibit anticompetitive behavior," the Nobel statement said.
But the research also argues that it is better to regulate the bad behavior directly rather than through policies that limit the size of corporations.