Investor-Consumer or Overall Welfare : Searching for the Paradigm of Recent Reforms in Financial Services Contracts

This article challenges the assumption that from an economic perspective the distribution of value (be it surplus or well-being) between parties in voluntary transactions matters at most for instrumental reasons — that is, for increasing the size of the pie. This assumption is probably the stronghold of institutional economics and traditional law and economics which most blatantly deviates from any legal perspective. A strain of economic literature going back at least to Adam Smith conceives of market relations as principal-agents relations between consumers and producers. As consumer welfare is not the only societal value, conflicts with other values can justify its sacrifice in some occasions. A just society cannot be reduced to an allocatively optimal general equilibrium. This article focuses on the development of two arguments in support of this framework. First, a coherence (or conceptual) argument. There is an astonishingly unexplored connection between the role of the consumer on the market and the investor in the firm — not to be confused with the “producers are consumers too” argument. Second, we build a principal multi agent framework where aggregate consumer welfare is the principal and consumers, entrepreneurs and the legal system are the agent. With this framework, we offer an explanation of central elements of the recently reformed EU financial services system, in particular fiduciary duties and the duty of responsible lending