Abstract
We describe the value of decentralized decision-making in the context of the assessment of systemic risks in the financial ecosystem and draw parallels to the lessons learned from the polycentric provision of local public goods. Greater resilience of the ecosystem requires methods of decentralized recruitment and quorum sensing, features that induce rapid optimization without centralized regulation in ecological systems. We describe the potential for recruitment and quorum sensing in two financial applications: securitization and thematic investing. Finally, we consider the potential and pitfalls presented by the use of blockchain and distributed ledgers to specific applications in sustainable finance, including prediction markets, distributed corporate governance, and trade finance.
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- 1.
So long as participants are rational, self-interested, and they interact repeatedly a finite number of times, game theory predicts that would overharvest the CPR.
- 2.
This process is now referred to as a Tiebout process.
- 3.
This means that the value of each individual contribution to the social good is high. This is more likely to be the case when there are fewer participants.
- 4.
Internal sanctions chosen by the participants tend to increase cooperation and monitoring. External sanctions imposed by a central regulator, on the other hand, tend to crowd out internal monitoring.
- 5.
The rebound effect is an example of the Jevons paradox. Investments in energy efficiency reduce the marginal cost of using energy, thereby inducing subsequent increases in the consumption of the outputs of energy use, such as hot water or internal ambient temperature. This leads to increases in energy consumption, though the increases only partially offset the initial reduction in energy use resulting from energy efficiency investments.
- 6.
For an outline of a range of public-private initiatives for renewable energy and energy efficiency such as guarantee structures, on-bill programs and property-assessed clean energy (PACE) programs in addition to green banks, see Probst (2014).
- 7.
As a matter of disclosure, one of the authors of the present volume (Bose) has worked as Principal Investigator of sponsored research related to IndexAmericas conducted at Columbia University and funded by IDB.
- 8.
As a matter of disclosure, two of the authors of the present volume (Bose & Guo) teach in Columbia’s Sustainability Management program.
- 9.
The hash value is an output of a cryptographic hash function which takes the previous block as an input. A hash function converts an input of letters and numbers into an encrypted output of a fixed length.
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Bose, S., Dong, G., Simpson, A. (2019). Decentralized Finance. In: The Financial Ecosystem. Palgrave Studies in Impact Finance. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-05624-7_12
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