This article introduces a special issue of Business and Politics on Property Rights, Financial Risk, and the Politics of a Networked Global Financial System. We introduce aspects of the articles in the issue and situate them within existing literatures in financial economics, public policy, political economy, regulation and governance, and network science. We do this through examining four key contributions in the special issue. First, we show that common conceptualizations of property rights in financial markets ignore the multidimensional nature of financial goods; examples of all goods types can be found in modern finance, and this fact has important implications for the politics and regulation of these markets. Second, we argue that models of financial actors as independent, atomistic agents neglect the relational nature of financial markets, and argue that theory and methodology from network science, financial economics and political economy provide useful ways to analyze these interdependent systems. Third, we discuss how the relational nature of risk leads to hierarchical patterns of financial interdependence, which bequeaths substantial amounts of power—within both market and political systems—to those actors that occupy core positions within the structure of interdependence. Fourth, we integrate ideas from papers in this special issue and related literature with concepts from the Ostrom School of political economy to consider how monitoring, self-governance, and polycentric applications might improve financial market governance. This issue's papers thus constitute one of the first combined attempts to bring the Ostrom School into substantive conversation with financial market governance and risk analysis through comparative and international political economy disciplines.

Are club goods becoming more widespread in developed economies, and, if so, what is the broader significance of this trend? Club goods are as salient for the profitability of non-financial firms as for finance. First, corporate strategy today largely revolves around the generation or acquisition of intellectual property rights and other club/franchise goods. Second, financialization is not just about the credit relationship between financial firms on the one side and non-financial corporate and household borrowers on the other, but also about Main Street's ability to use financial power to suppress competition in its own markets. Third, firms’ strategic reliance on IPRs and club goods more generally has magnified both profit and wage inequality in the broader economy. This inequality combines with changes in corporate structure to produce a significant part of the household level income inequality we currently observe in the United States. Fourth, all these processes are ineluctably political, because the state necessarily constitutes club or franchise goods, just like any property right. But the quantity and quality of those property rights is an indeterminate outcome of struggles among firms over the size of and shares of the pool of profits in a given national and global economy.

Avoidance of risk and increasing returns are the two main motivators in finance. Returns are better understood and perhaps more easily regulated than financial risk, which is a complex and slippery concept. Financial risk may be best conceived of as a complementary good, but the nature of this good varies as the size of the investment position scales up. That is, the effects of financial risk may be conceived of as a private good for a small financial actor, but becomes a club good, then a common pool, and occasionally a public good as the impact of the investment position's financial risk spreads to affect more of society. Examining banking history shows us that banks and bankers have offset risk while retaining returns through structuring financial products and investment vehicles as club goods, thereby enabling financial actors to jointly benefit from ownership while harming those outside the club walls. Not surprisingly, this capacity to push risk outside club walls has grown commensurate with the political influence of banks and bankers. Laying out governance strategies and concepts, I suggest that in some circumstances pervasive club good structures in finance may be employed to gather regulation-enhancing information, to better understand the networked nature of financial risk and to craft self-governance structures.

The international financial crisis was followed by waves of domestic regulatory reforms, first and foremost, in the United States and the European Union. Post-crisis financial regulation was sometimes different across jurisdictions. Moreover, the United States and the European Union sought in various ways to (re)assert their regulatory power not only vis-à-vis the market, but also with regard to other jurisdictions, which often resisted the projection of regulatory power beyond national borders. Consequently, a handful of important post-crisis transatlantic regulatory disputes emerged concerning E.U. rules on hedge funds, U.S. rules on bank structure and E.U. and U.S. rules on over-the-counter (OTC) derivatives. These disputes mainly involved the terms of access to each other's markets, the equivalence between domestic rules, and the extraterritorial effects of those rules. Some of these disputes were also intra-E.U. disagreements, whenever the preferences of the United Kingdom were different from those of Continental countries and similar to those of the United States. The network structure of the financial industry and the patterns of financial interdependence across the Atlantic amplified the extra territorial effects of domestic reforms, but at the same time triggered an active involvement of the transnational financial industry in the management and, eventually, the settlement of these disputes.

Predominant models of financial regulation based on representative agents—in both the public interest and public choice traditions—assume that competitive pressures in financial markets undermine prudential behavior by firms in the absence of regulation. One empirical expectation of these models is behavioral: firms should adjust their risk-taking behaviors in response to the regulatory environment they face but should not over-comply with regulations. That is, the central tendency of bank behaviors should hew closely to regulatory minima and the variance should be small. I first demonstrate that this expectation is not borne out by the empirical record and then advance a theoretical argument that does not rely on a representative agent model. I argue that firms face a range of incentives from markets and governments that condition their risk-taking behaviors, and firms choose a “preferred habitat” within a market structure. Some of these incentives are towards greater risk-taking, while others are in the direction of greater prudence. This framework provides opportunities for examining financial market actors in a realistic context, and offers ways to unify micro-level and structural analyses of the political economy of global finance.

Since 2008, a massive shift has occurred from active toward passive investment strategies. The passive index fund industry is dominated by BlackRock, Vanguard, and State Street, which we call the “Big Three.” We comprehensively map the ownership of the Big Three in the United States and find that together they constitute the largest shareholder in 88 percent of the S&P 500 firms. In contrast to active funds, the Big Three hold relatively illiquid and permanent ownership positions. This has led to opposing views on incentives and possibilities to actively exert shareholder power. Some argue passive investors have little shareholder power because they cannot “exit,” while others point out this gives them stronger incentives to actively influence corporations. Through an analysis of proxy vote records we find that the Big Three do utilize coordinated voting strategies and hence follow a centralized corporate governance strategy. However, they generally vote with management, except at director (re-)elections. Moreover, the Big Three may exert “hidden power” through two channels: First, via private engagements with management of invested companies; and second, because company executives could be prone to internalizing the objectives of the Big Three. We discuss how this development entails new forms of financial risk.

The financial system is governed not just by formal rules but also by social relationships that pervade the elite strata of society. Understanding such dynamics entails understanding complex relational ties between actors, a task that can be facilitated through the use of network analysis. We argue that a latent feature of interest to scholars of the political economy of finance is one of social distance, which is a measurable concept. Using new data from the financial sector, we measure the social distance between a range of financial firms and one key regulator, the U.S. Securities and Exchange Commission (SEC), over time to assess whether or not social distance is related to organizations’ advocacy behavior. We find a positive relationship between how close a given organization is to the SEC and how often it engages in advocacy. The result persists when we control for numerous factors related to organizational characteristics, firm size, and when we measure advocacy frequency in different ways.

We contribute to the post-crisis literature on macroeconomic stability by arguing that polycentric banking systems can better achieve stability than monocentric systems. Building on the theories of E. Ostrom, we engage the literature on free banking systems to show that these systems met the requirements of polycentric governance systems, and that the unintentional result of the underlying governance institutions was macroeconomic stability. In contrast, modern central banking, because it is monocentric, lacks important features regarding knowledge aggregation and incentive compatibility conducive to generating macroeconomic stability. We conclude by discussing various legal barriers that stand in the way of a transition from monetary monocentrism to monetary polycentrism.