Capital Polarization Paper Series Part 3 | Boards of Directors Create Inequality — Corporate Governance and Wealth Polarization Revealed by Chatterjee (2021)
How do financial elites design systems — the power structure of financial elites revealed by Paolinelli (2024)
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■ Key questions
Why is the stock market designed to be unfavorable to individual investors?
Why does inequality worsen as regulations become stronger?
Paolinelli (2024) analyzed that the answer lies in the elite network that designs the financial system.
■ Paper outline
- Author: Elia Paolinelli
- Source: Global Handbook of Inequality (Springer, 2024)
- Key argument: Financial elites are not simply high-income earners, but constitute a network of power that shapes the financial system, regulatory environment, and market structure itself. This network operates as a mechanism for reproducing structural inequality.
■ What the paper proves
- Financial elites form a network with a revolving door structure connecting investment banks, hedge funds, private equity funds, regulatory agencies, and academia.
- This network directly participates in the design of financial regulations and reproduces an institutional environment favorable to the elite.
- The reason why information asymmetry is structured is not because of differences in individual abilities, but because of a structure in which an elite network monopolizes information.
- Provides empirical examples of how regulations that were strengthened after the financial crisis were bypassed or eased through elite networks.
■ Connection with relational risk: Risk created by elite networks
The elite network structure revealed by Paolinelli in the global financial system explains the origin of the pattern captured by relational risk in the Korean small-cap market.
① Revolving door structure = extreme form of human risk
- People who circulate in financial authorities, securities firms, and corporate boards monopolize information and power.
- In Korea, the pattern of concurrent employment and job change for former Financial Supervisory Service employees, securities company executives, and corporate directors is the Korean version of this revolving door structure.
- Relational risk captures this revolving door pattern through executive network analysis → Signal of rising human risk
② Information monopoly structure = structural disadvantage for individual investors
- The structuring of information asymmetry demonstrated by Paolinelli explains why individual investors become aware of CB issuance, executive changes, and governance changes only after the fact.
- Information that is already known within the elite network does not reach general investors until the time of disclosure.
- Relational risk partially resolves this information asymmetry structure by detecting changes in the relationship network before disclosure.
③ Regulatory bypass = Structural background of governance risk
- Paolinelli's finding that strengthened regulations are bypassed through elite networks is consistent with the phenomenon of CB refixing regulations and disclosure obligations being repeatedly framed in Korea.
- Even if the letter of the system changes, the substance does not change → Repeated confirmation in companies with high governance risk
■ Comment
Paolinelli demonstrated that inequality is not a matter of individual choice or ability, but a matter of system design.
The system is implemented in the Korean capital market through the CB issuance structure, board composition method, and announcement timing.
Individual investors play on a game board designed by the elite network without knowing the rules.
Relational risk is an attempt to reveal the rules.
When the network starts moving — the alarm should go off then.
■ Reference materials
-Paolinelli, E. (2024). Financial Elites. In B. Greve (Ed.), Global Handbook of Inequality. Springer.
- RaymondsRisk White Paper v1.1: https://www.konnect-ai.net/whitepaper
- Relational Risk Blog: https://blog.naver.com/raymondsrisk
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