Ronald Coase and others writing in his wake typically assume that institutional arrangements evolve to minimize transaction costs. This Article draws attention to a powerful, market-based force that operates contrary to that core assumption: “intermediary influence.” The claim builds on three observations: (1) many transaction costs now take the form of fees paid to specialized intermediaries, (2) intermediaries prefer institutional arrangements that yield higher transaction fees, and (3) intermediaries are often well positioned to promote self-serving arrangements. As a result, high-fee institutional arrangements often remain entrenched even in the presence of more-efficient alternatives.

This Article uses numerous case studies from the financial markets to illustrate how intermediaries acquire influence over time and how they have used that influence to promote high-fee arrangements. It further shows that intermediary influence helps to explain an array of observable trends—including the growth and increasing complexity of the financial sector—that are not readily reconciled with traditional predictions. After identifying some of the welfare losses that can result, this Article considers the implications of intermediary influence for both theory and policy.