The place of law : institutional influences on financial sector agglomeration and location choice

Abstract

Causal relationships between the nature of law and the functioning of financial systems have been theorised or observed since the mid-1990s. No such connection has been drawn with financial centre development, despite survey evidence of how commercial actors value the rule of law, and scholars in non-legal disciplines claiming that it may influence the growth or decay of major centres of finance. This study proposes an explanation in commercial law for clustering behaviour by financial intermediaries, and thus for the development of substantive financial hubs.

"The Place of Law" is concerned with how law affects exchange within professional financial markets. It considers whether institutional incentives guide the location choices of intermediaries and encourage competitors to cluster together. To the extent that Hong Kong, for example, is host to banking or equity market activity more than warranted by its domestic economy or to a markedly different extent than neighbouring Macau, has the law in some way led to this result?

Contracts made in organised financial markets have been shown as having commercial implications extending beyond the parties engaged in the exchange, and while markets are essentially agglomerations of bilateral contracts, they function in a more complex legal manner, not only due to external law and regulation but from entrenched rules of conduct to which participants typically adhere, in part due to concerns as to enforcement and contractual completeness. This study will argue further that clustering assists facilitative social connectivity and reciprocity, and helps foster reputational capital, which are important resources when intermediaries compete for business and execute transactions.

The study contains two innovations, first, using considerations of commercial law and financial practice to address a theoretical gap in the legal origins scholarship; second, characterising financial centres as agglomerations of activity that sustain real qualities and resources. It is able as a result to consider financial centres in relation to the operation of formal and customary law. Succeeding chapters will show relational contract theory as a faithful characterisation of exchange within organised markets, and employ it to connect accepted concepts of the rule of law with market formation and by extension to financial sector agglomeration.