Economics traditionally studies phenomena using models of game theory and competitive equilibrium. Game theory is well suited for the study of interaction in small groups and competitive equilibrium is appropriate for the interaction in large groups. Much of economic activity, however, takes place at the intersection of anonymous markets and local social networks.
There has been increasing interest in the study of the role of financial frictions and distortions in shaping the transmission of shocks and policies, and determining the level of demand and economic activity within and across borders. A key question concerns the extent to which macro models can account for stylized facts apparently at odds with well-functioning, integrated financial markets.
Economics starts from the premise that phenomena should be understood as a result of individual choices. Competition, coordination, and learning are vital in aggregating individual choices. Research in this field aims to deepen our understanding of risk-sharing, herding and crises in financial markets, and the incentives and efficiency of auctions and matching mechanisms.
Financial markets serve the important function of transferring risk across individuals and over time, and they provide information on the performance of firms and economies. So their effective performance is of great interest to policymakers, pension holders, and consumers, yet recent events have created profound mistrust about their operation.
The Institute has been set up with generous funding from the Institute for New Economic Thinking (INET), the Cambridge Endowment for Research in Finance (CERF), The Isaac Newton Trust and the Keynes Fund for Applied Research.