Roxana Mihet
Who Benefits from Innovations in Financial Technology?
Abstract: Financial technology affects both efficiency and equity in the stock market. Its impact is non-trivial because several key improvements have altered multiple dimensions of investors’ opportunity sets at the same time. For example, better and faster computing in the big data era has made it cheaper for individual investors to participate and to identify fund managers with skill. However, the increase in alternative data availability has also made it cheaper for wealthier, more sophisticated investors to acquire better private information about asset returns. Some experts believe these innovations will increase financial inclusion. Others worry about possible winner-takes-all effects that can lead to more unequal rent distribution. To address this debate, I first build a theoretical model of intermediated trading under asymmetric information that allows me to differentiate between the effects of each innovation. The key theoretical finding is that, even if investors have increased access to the equity premium through cheap funds, improvements in financial technology disproportionately benefit wealthy investors and induce an information-biased technological change that helps the wealthy become wealthier and hurts the poor. I then use the model to interpret US macro data from the last 40 years. I find that, although the gains from financial technology were accruing to low-wealth investors throughout the 1990s, they have been accruing to high-wealth investors since the early 2000s. Further advances in modern computing, big data, and artificial intelligence in the skilled asset management industry, in the absence of any gains redistribution, may accelerate the rate of change.