Merton Miller (best-known as the Nobel-Prize winning co-author of the Modigliani-Miller Theorem concluded that the primary drivers were regulation and taxation; tax and regulation are "the major impulses to successful innovation."1 Miller described financial innovations as "seeds beneath the snow, waiting for some change in the environment to bring them about."2
There are a basic set of features of a financial product - "ingredients" which can be mixed and matched "bundled and unbundled" to create new products:
"At its basic level, the financial instrument is a contract written on paper and potentially all possible financial contracts can be written without any technological barrier (Desai and Low, 1987, p. 115). In this sense, financial innovations are not new goods. They are implicitly always there, but in zero supply (Greenbaum and Heywood, 1973). …. Dufey and Giddy (1981) argue that financial innovation largely consists in the development of new ways of bundling the basic services. While the bundling and unbundling exhibits an infinite variety, the basic products themselves have remained largely unchanged. As Niehans (1983, p. 538) puts it, 'Except for electronic technology, if an experienced banker from medieval Venice or Geneva came to life again, he could understand the operations of a modern bank in a matter of days.3"
Other factors include issuers desire to reduce information and agency costs when raising capital.
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