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Interplay of Financial Structure and Financial Agent Behaviors in Economic Welfare

Tamara Diella, Ira Fachira


Abstract. This paper unearths the interaction of financial intermediaries as financial structure and financial agent’s behaviors in shaping economic welfare given the dynamic nature of economy. The paper acts as an intuitive walk with interconnected conclusions from one finding to another and raises the issue through juxtaposing opposite economic policies (no-usury policy in ancient Greek civilization and modern capital market) with strikingly similar economic outcomes of wealth inequality. It sheds light that financial structure and agent’s behaviors have more important influence compared to that of financial instrument in shaping welfare. Through historical overview, it shows the responsiveness of economy (acceptance and adoption of interest rate). The qualitative synthesis suggests that economic policies ought to possess complementary approaches to overcome structural (moral hazard and credit risk) and behavioral issues (agent’s speculative tendency and predictive ability). The practical implication is capital and liquidity requirements to financial intermediaries for structural issues and Tobin tax and commitment of long-run fiscal policy for behavioral ones. The reflexive nature of economy has a theoretical and managerial implications that economic policies ought to be constantly evaluated and give a sense of security to intermediaries and agents to yield the most satisfactory outcomes.

Keywords: economic welfare; financial architecture; financial intermediaries; financial agents; behavioral economics


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