Friday, November 21, 2008

Beaujolais Nouveau and Institutionalist Economics

Rationalité limitée has an interesting post this morning explaining the enthusiasm for beaujolais nouveau in terms of institutional factors shaping the market for wine. The example is extended to explain the influence of "reputational intermediaries" in shaping the market for complex financial products. In plain language, the wine lobby was able to persuade a lot of people that beaujolais nouveau is worth celebrating even though it isn't very good, and Lehman Brothers was able to persuade a lot of people that collateralized debt obligations were a valuable risk-dispersing innovation, even though they turn out to be a lot more toxic than this year's primeurs de Beaujolais.

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