Professor Andreas Scherer, University of Zurich
While existing research describes how social science theories shape social reality and points to some negative consequences for social welfare, it remains largely silent on how such theories should shape social reality. To address this gap in the literature, we focus on financial regulation to develop a normative framework for assessing the impact of theories on social welfare. More specifically, we investigate how theories should shape financial regulation if they are to enhance social welfare. For that purpose, we use a recent financial innovation, high-frequency trading, to show that current research by financial economists and sociologists of finance reinforces technocratic financial regulation. This approach to regulation, however, diminishes social welfare by focusing too narrowly on questions of efficiency and stability. We argue that, to remedy this problem, researchers from different disciplines should explore whether financial innovations make the economy more just. Management researchers can make a distinct contribution to this endeavour by analysing how financial innovations – mediated by their impact on financial and non-financial firms – influence top incomes. We suggest that such research can help reshape financial regulation and enhance social welfare.