This article shows that the behavior of perfectly rational financial actors can cause financial meltdowns like the ones that occurred in 2007 and 2008. It analyzes the nature of informational asymmetries and group pathologies common in financial transactions and the role of intermediaries and...

Financial systems are shaped by conscious design and market forces. The Dodd-Frank Act is, at least in part, a collection of mechanisms to supplement and better channel market incentives. It expands the scope of financial regulation and requires regulators to engage in a full-scale...