Markus K. Brunnermeier
- Published in print:
- 2001
- Published Online:
- November 2003
- ISBN:
- 9780198296980
- eISBN:
- 9780191596025
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0198296983.003.0002
- Subject:
- Economics and Finance, Financial Economics
Ch. 2 first exposes the reader to a more tractable notion of common knowledge and the intuition behind proofs of the different no‐trade theorems. The no‐trade theorems state the specific conditions ...
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Ch. 2 first exposes the reader to a more tractable notion of common knowledge and the intuition behind proofs of the different no‐trade theorems. The no‐trade theorems state the specific conditions under which differences in information alone do not lead to trade. The next section sketches out a brief introduction of the basics of asset pricing under symmetric information and highlights the complications that can arise under asymmetric information. Information revelation by prices is closely linked to the security structure and market completeness. The chapter also provides definitions of bubbles and investigates the existence of bubbles under common knowledge. It then illustrates the importance of higher‐order uncertainty for the possible existence of bubbles.Less
Ch. 2 first exposes the reader to a more tractable notion of common knowledge and the intuition behind proofs of the different no‐trade theorems. The no‐trade theorems state the specific conditions under which differences in information alone do not lead to trade. The next section sketches out a brief introduction of the basics of asset pricing under symmetric information and highlights the complications that can arise under asymmetric information. Information revelation by prices is closely linked to the security structure and market completeness. The chapter also provides definitions of bubbles and investigates the existence of bubbles under common knowledge. It then illustrates the importance of higher‐order uncertainty for the possible existence of bubbles.
Markus K. Brunnermeier
- Published in print:
- 2001
- Published Online:
- November 2003
- ISBN:
- 9780198296980
- eISBN:
- 9780191596025
- Item type:
- book
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0198296983.001.0001
- Subject:
- Economics and Finance, Financial Economics
Asset prices are driven by public news and information that is dispersed among many market participants. Traditional asset pricing theories have assumed that all investors hold symmetric information. ...
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Asset prices are driven by public news and information that is dispersed among many market participants. Traditional asset pricing theories have assumed that all investors hold symmetric information. Research in the past two decades has shown that the inclusion of asymmetric information drastically alters traditional results. This book provides a detailed up‐to‐date survey that serves as a map for students and other researchers navigating through this literature.The book starts by introducing the reader to different knowledge, equilibrium, and efficiency concepts. After explaining no‐trade theorems, it highlights the important role of asymmetric information in explaining the existence and anatomy of bubbles. The subsequent overview of market microstructure models shows how information is reflected in prices and how traders can infer it from prices. Insights derived from herding models are used to provide explanations for stock market crashes. If investors have short horizons, price correcting arbitrage activity is limited and investors have a tendency to focus on the same (possible unimportant) news, a phenomena that led Keynes to compare the stock market with a beauty contest. The book concludes with a brief summary of bank runs and their connection to financial crises.In summary, models with asymmetric information provide a better understanding of bubbles, crashes, and other market inefficiencies and frictions.Less
Asset prices are driven by public news and information that is dispersed among many market participants. Traditional asset pricing theories have assumed that all investors hold symmetric information. Research in the past two decades has shown that the inclusion of asymmetric information drastically alters traditional results. This book provides a detailed up‐to‐date survey that serves as a map for students and other researchers navigating through this literature.
The book starts by introducing the reader to different knowledge, equilibrium, and efficiency concepts. After explaining no‐trade theorems, it highlights the important role of asymmetric information in explaining the existence and anatomy of bubbles. The subsequent overview of market microstructure models shows how information is reflected in prices and how traders can infer it from prices. Insights derived from herding models are used to provide explanations for stock market crashes. If investors have short horizons, price correcting arbitrage activity is limited and investors have a tendency to focus on the same (possible unimportant) news, a phenomena that led Keynes to compare the stock market with a beauty contest. The book concludes with a brief summary of bank runs and their connection to financial crises.
In summary, models with asymmetric information provide a better understanding of bubbles, crashes, and other market inefficiencies and frictions.
Markus K. Brunnermeier
- Published in print:
- 2001
- Published Online:
- November 2003
- ISBN:
- 9780198296980
- eISBN:
- 9780191596025
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0198296983.003.0001
- Subject:
- Economics and Finance, Financial Economics
Ch. 1 shows the reader how to model asymmetric information and knowledge in theoretical economics. It also introduces the concept of higher‐order knowledge. For the analysis of bubbles it is ...
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Ch. 1 shows the reader how to model asymmetric information and knowledge in theoretical economics. It also introduces the concept of higher‐order knowledge. For the analysis of bubbles it is important to draw a distinction between mutual knowledge, e.g. all traders know that the price is too high, and common knowledge, i.e. they all know this and that all know and so on. Prices are determined in equilibrium. The two most commonly used equilibrium concepts in market settings with asymmetric information are the competitive Rational Expectations Equilibrium (REE) concept and the strategic Bayesian Nash Equilibrium concept. The chapter compares and contrasts both equilibrium concepts and also highlights their conceptual problems. This chapter also introduces and contrasts the two efficiency concepts: informational efficiency and allocative efficiency.Less
Ch. 1 shows the reader how to model asymmetric information and knowledge in theoretical economics. It also introduces the concept of higher‐order knowledge. For the analysis of bubbles it is important to draw a distinction between mutual knowledge, e.g. all traders know that the price is too high, and common knowledge, i.e. they all know this and that all know and so on. Prices are determined in equilibrium. The two most commonly used equilibrium concepts in market settings with asymmetric information are the competitive Rational Expectations Equilibrium (REE) concept and the strategic Bayesian Nash Equilibrium concept. The chapter compares and contrasts both equilibrium concepts and also highlights their conceptual problems. This chapter also introduces and contrasts the two efficiency concepts: informational efficiency and allocative efficiency.
E. Philip Davis
- Published in print:
- 1995
- Published Online:
- November 2003
- ISBN:
- 9780198233312
- eISBN:
- 9780191596124
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0198233310.003.0006
- Subject:
- Economics and Finance, Financial Economics
Turning from financial fragility to systemic risk, the next two chapters seek to make an initial assessment of the causes, nature, and consequences of financial instability in contemporary financial ...
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Turning from financial fragility to systemic risk, the next two chapters seek to make an initial assessment of the causes, nature, and consequences of financial instability in contemporary financial markets by means of an examination of the features of six recent periods of financial disorder, in the light of the various theoretical approaches to financial crisis that have been proposed in the literature. To what extent did financial instability follow directly from financial fragility in the non‐financial sectors, with defaults by companies or households progressively weakening the balance sheets of financial institutions? Or were risks other than credit risk primarily responsible? Were the periods of financial instability ‘unique events’ or can common features be discerned? How well do the predictions of the theoretical paradigms fit the actual data? This chapter provides the theoretical background, while Ch. 6 offers an empirical assessment. We cover the financial fragility, monetarist, uncertainty, credit rationing/disaster myopia, and asymmetric information strands of the theory of financial instability.Less
Turning from financial fragility to systemic risk, the next two chapters seek to make an initial assessment of the causes, nature, and consequences of financial instability in contemporary financial markets by means of an examination of the features of six recent periods of financial disorder, in the light of the various theoretical approaches to financial crisis that have been proposed in the literature. To what extent did financial instability follow directly from financial fragility in the non‐financial sectors, with defaults by companies or households progressively weakening the balance sheets of financial institutions? Or were risks other than credit risk primarily responsible? Were the periods of financial instability ‘unique events’ or can common features be discerned? How well do the predictions of the theoretical paradigms fit the actual data? This chapter provides the theoretical background, while Ch. 6 offers an empirical assessment. We cover the financial fragility, monetarist, uncertainty, credit rationing/disaster myopia, and asymmetric information strands of the theory of financial instability.
Jean‐Jacques Laffont
- Published in print:
- 2001
- Published Online:
- November 2003
- ISBN:
- 9780199248681
- eISBN:
- 9780191596575
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0199248680.003.0001
- Subject:
- Economics and Finance, Microeconomics
The author traces the origins of incentives in the design of political institutions to the works of Adam Smith, the American Federalists, and R. Frisch. The Chicago View of interest group politics is ...
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The author traces the origins of incentives in the design of political institutions to the works of Adam Smith, the American Federalists, and R. Frisch. The Chicago View of interest group politics is critically reviewed and seen as the background for the modern principal‐agent analysis of political economy. The structure of the book is reviewed and basic concepts of complete and incomplete contracting, asymmetric information, and endogenous coalition formation are introduced.Less
The author traces the origins of incentives in the design of political institutions to the works of Adam Smith, the American Federalists, and R. Frisch. The Chicago View of interest group politics is critically reviewed and seen as the background for the modern principal‐agent analysis of political economy. The structure of the book is reviewed and basic concepts of complete and incomplete contracting, asymmetric information, and endogenous coalition formation are introduced.
Philipp Zahn and Evguenia Winschel
- Published in print:
- 2017
- Published Online:
- September 2017
- ISBN:
- 9780262035651
- eISBN:
- 9780262337915
- Item type:
- chapter
- Publisher:
- The MIT Press
- DOI:
- 10.7551/mitpress/9780262035651.003.0002
- Subject:
- Economics and Finance, History of Economic Thought
In most laboratory experiments concerning prosocial behavior subjects are fully informed how their decision influences the payoff of other players. Outside the laboratory, for instance when voting ...
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In most laboratory experiments concerning prosocial behavior subjects are fully informed how their decision influences the payoff of other players. Outside the laboratory, for instance when voting for a policy reform proposal, individuals typically have to decide without such detailed knowledge. To assess the effect of information asymmetries on prosocial behavior, we conduct a laboratory experiment with a simple non-strategic interaction. A dictator has only limited knowledge about the benefits his prosocial action generates for a recipient. We observe subjects with heterogenous social preferences, in particular inequalityaverse and efficiency-concerned individuals. While under symmetric information only individuals with the same type of preferences transfer, under asymmetric information different types transfer at the same time. As a consequence and the main finding of our experiment, uninformed dictators behave more prosocially than informed dictators. In an ex-post analysis of our experiment we also find that the differences in behavior under symmetric information are mostly driven by gender: women tend to be more inequality-averse, men tend to be more efficiency-concerned. Yet, both transfer under asymmetric information.Less
In most laboratory experiments concerning prosocial behavior subjects are fully informed how their decision influences the payoff of other players. Outside the laboratory, for instance when voting for a policy reform proposal, individuals typically have to decide without such detailed knowledge. To assess the effect of information asymmetries on prosocial behavior, we conduct a laboratory experiment with a simple non-strategic interaction. A dictator has only limited knowledge about the benefits his prosocial action generates for a recipient. We observe subjects with heterogenous social preferences, in particular inequalityaverse and efficiency-concerned individuals. While under symmetric information only individuals with the same type of preferences transfer, under asymmetric information different types transfer at the same time. As a consequence and the main finding of our experiment, uninformed dictators behave more prosocially than informed dictators. In an ex-post analysis of our experiment we also find that the differences in behavior under symmetric information are mostly driven by gender: women tend to be more inequality-averse, men tend to be more efficiency-concerned. Yet, both transfer under asymmetric information.
David Miller
- Published in print:
- 1990
- Published Online:
- November 2003
- ISBN:
- 9780198278641
- eISBN:
- 9780191599903
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0198278640.003.0008
- Subject:
- Political Science, Political Theory
How can exploitation—in the sense of taking advantage of other people—occur in market settings? Marx understood exploitation in terms of unilateral transfers of value. Steiner and Roemer understand ...
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How can exploitation—in the sense of taking advantage of other people—occur in market settings? Marx understood exploitation in terms of unilateral transfers of value. Steiner and Roemer understand it in terms of exchanges made against the background of an unjust distribution of resources. In opposition to these views, it is argued that exploitative transactions are exchanges made at non‐equilibrium prices, due to asymmetries of information or of bargaining power. This view of exploitation allows us to understand why capitalism is inherently exploitative, whereas under market socialism, exploitation would only occur in specific circumstances.Less
How can exploitation—in the sense of taking advantage of other people—occur in market settings? Marx understood exploitation in terms of unilateral transfers of value. Steiner and Roemer understand it in terms of exchanges made against the background of an unjust distribution of resources. In opposition to these views, it is argued that exploitative transactions are exchanges made at non‐equilibrium prices, due to asymmetries of information or of bargaining power. This view of exploitation allows us to understand why capitalism is inherently exploitative, whereas under market socialism, exploitation would only occur in specific circumstances.
Hans Degryse, Moshe Kim, and Steven Ongena
- Published in print:
- 2009
- Published Online:
- October 2011
- ISBN:
- 9780195340471
- eISBN:
- 9780199852406
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195340471.003.0004
- Subject:
- Economics and Finance, Microeconomics
This chapter defines the lender–borrower relationship and introduces methodologies duration, Tobit, count, nested multinomial logit, and heteroskedastic regression models. It summarizes the evidence ...
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This chapter defines the lender–borrower relationship and introduces methodologies duration, Tobit, count, nested multinomial logit, and heteroskedastic regression models. It summarizes the evidence on the determinants of characteristics of bank relationships—duration, scope, number, and intensity. For instance, it cites the impact of relationships on the cost and availability of credit and firm performance. The results section also deals with bank strategy and its orientation and specialization.Less
This chapter defines the lender–borrower relationship and introduces methodologies duration, Tobit, count, nested multinomial logit, and heteroskedastic regression models. It summarizes the evidence on the determinants of characteristics of bank relationships—duration, scope, number, and intensity. For instance, it cites the impact of relationships on the cost and availability of credit and firm performance. The results section also deals with bank strategy and its orientation and specialization.
Howard Bodenhorn
- Published in print:
- 2002
- Published Online:
- November 2003
- ISBN:
- 9780195147766
- eISBN:
- 9780199832910
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0195147766.003.0003
- Subject:
- Economics and Finance, Economic History
Modern theories of financial intermediation begin from the premise that small, young firms, due to information asymmetries, will not have access to arm's length markets in bonds and commercial paper. ...
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Modern theories of financial intermediation begin from the premise that small, young firms, due to information asymmetries, will not have access to arm's length markets in bonds and commercial paper. Small and young firms must rely on financial intermediaries, principally banks, with whom these firms form long‐run relationships. Modern theory stands in contrast to the dominant contemporary theory of banking practice; namely, the real‐bills doctrine. Banks that followed the doctrine loaned only to established businesses with impeccable reputations. Had early American bankers adhered to the doctrine, they would not have been the engines of growth that they actually became. Banks mattered because they encouraged entrepreneurship by being entrepreneurial themselves.Less
Modern theories of financial intermediation begin from the premise that small, young firms, due to information asymmetries, will not have access to arm's length markets in bonds and commercial paper. Small and young firms must rely on financial intermediaries, principally banks, with whom these firms form long‐run relationships. Modern theory stands in contrast to the dominant contemporary theory of banking practice; namely, the real‐bills doctrine. Banks that followed the doctrine loaned only to established businesses with impeccable reputations. Had early American bankers adhered to the doctrine, they would not have been the engines of growth that they actually became. Banks mattered because they encouraged entrepreneurship by being entrepreneurial themselves.
Pranab Bardhan and Christopher Udry
- Published in print:
- 1999
- Published Online:
- November 2003
- ISBN:
- 9780198773719
- eISBN:
- 9780191595929
- Item type:
- book
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0198773714.001.0001
- Subject:
- Economics and Finance, Development, Growth, and Environmental
Development Microeconomics looks at a broad spectrum of topics in development economics, combining the strength of conventional developmental thought with the insights of contemporary ...
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Development Microeconomics looks at a broad spectrum of topics in development economics, combining the strength of conventional developmental thought with the insights of contemporary mainstream economics. This book intends to provide illustrations of microeconomic analyses of economic development by utilizing simple, theoretical, micro models of some of the key economic issues in poor countries. In particular, it draws upon the breakthrough in economic theory that has taken the form of an explicit treatment of information, including information in the sense of human capital and technical knowledge. Much of the analysis in this book applies the theory of asymmetric information and in the process helps explain why perfect competition models are inadequate when dealing with developing economies. Several of the chapters thus explore issues of information‐based market failures and fragmentation, incomplete and imperfect markets, dynamic externalities, multiple equilibria, and self‐reinforcing mechanisms that cause dysfunctional institutions to persist. The authors stress the necessity of balance when looking at some of the classic developmental questions—the importance of both the individual as economic agent and of cultural norms in socio‐economic interactions, the dual relationship between equity and efficiency, the importance of market rivalry, and the potential for information‐based market breakdown and coordination failure. There is also a focus on the rural and the agrarian, with chapters on rural land and labour markets, and on rural credit and insurance institutions. There are also chapters on household economics, demography, and on migration in which behavioral assumptions play a central role. Other issues studied include the environment, trade, the dual economy, intersectoral complementarities, and institutional economics.Less
Development Microeconomics looks at a broad spectrum of topics in development economics, combining the strength of conventional developmental thought with the insights of contemporary mainstream economics. This book intends to provide illustrations of microeconomic analyses of economic development by utilizing simple, theoretical, micro models of some of the key economic issues in poor countries. In particular, it draws upon the breakthrough in economic theory that has taken the form of an explicit treatment of information, including information in the sense of human capital and technical knowledge. Much of the analysis in this book applies the theory of asymmetric information and in the process helps explain why perfect competition models are inadequate when dealing with developing economies. Several of the chapters thus explore issues of information‐based market failures and fragmentation, incomplete and imperfect markets, dynamic externalities, multiple equilibria, and self‐reinforcing mechanisms that cause dysfunctional institutions to persist. The authors stress the necessity of balance when looking at some of the classic developmental questions—the importance of both the individual as economic agent and of cultural norms in socio‐economic interactions, the dual relationship between equity and efficiency, the importance of market rivalry, and the potential for information‐based market breakdown and coordination failure. There is also a focus on the rural and the agrarian, with chapters on rural land and labour markets, and on rural credit and insurance institutions. There are also chapters on household economics, demography, and on migration in which behavioral assumptions play a central role. Other issues studied include the environment, trade, the dual economy, intersectoral complementarities, and institutional economics.
Clark C. Gibson
- Published in print:
- 2005
- Published Online:
- October 2005
- ISBN:
- 9780199278855
- eISBN:
- 9780191602863
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0199278857.003.0003
- Subject:
- Economics and Finance, Development, Growth, and Environmental
This chapter explores the obstacles and possibilities for development at the collective-choice level, and discusses the difficulties most likely to thwart efforts to solve collective-action ...
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This chapter explores the obstacles and possibilities for development at the collective-choice level, and discusses the difficulties most likely to thwart efforts to solve collective-action situations in recipient countries, including how the reality of weak, bad, or missing institutions hampers development efforts. It unpacks the challenges arising at the collective-choice level by emphasizing the problems of information and motivation. Questions are posed about development aid in an effort to improve its design and outcome.Less
This chapter explores the obstacles and possibilities for development at the collective-choice level, and discusses the difficulties most likely to thwart efforts to solve collective-action situations in recipient countries, including how the reality of weak, bad, or missing institutions hampers development efforts. It unpacks the challenges arising at the collective-choice level by emphasizing the problems of information and motivation. Questions are posed about development aid in an effort to improve its design and outcome.
Nirvikar Singh
- Published in print:
- 1991
- Published Online:
- November 2003
- ISBN:
- 9780198287629
- eISBN:
- 9780191595912
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0198287623.003.0003
- Subject:
- Economics and Finance, Development, Growth, and Environmental
Surveys the theoretical literature on the rationale of sharecropping, with special emphasis on the roles of risk‐sharing, incentive provision, wealth constraints, and screening in an environment of ...
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Surveys the theoretical literature on the rationale of sharecropping, with special emphasis on the roles of risk‐sharing, incentive provision, wealth constraints, and screening in an environment of pervasive uncertainty, and information asymmetry.Less
Surveys the theoretical literature on the rationale of sharecropping, with special emphasis on the roles of risk‐sharing, incentive provision, wealth constraints, and screening in an environment of pervasive uncertainty, and information asymmetry.
Alan Peacock and Ilde Rizzo
- Published in print:
- 2008
- Published Online:
- May 2008
- ISBN:
- 9780199213177
- eISBN:
- 9780191707124
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199213177.003.0008
- Subject:
- Economics and Finance, Public and Welfare
Public intervention to promote heritage services is usually justified by assuming that the market fails to provide some ‘optimum’ level of provision. As argued in Chapter 2, even meeting the ...
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Public intervention to promote heritage services is usually justified by assuming that the market fails to provide some ‘optimum’ level of provision. As argued in Chapter 2, even meeting the requirements of consumer sovereignty offers reasons for intervention. In practice governments can use a variety of measures to ‘correct’ the market. They can influence heritage provision by such positive incentives as loans or grants, and tax relief and regulatory regimes that induce providers to direct their operations towards public objectives, as required by planning restrictions. There are two major problems about following a policy consistent operating through and not against the market. The first is avoiding side effects which make other policy objectives more difficult to reach, e.g., tax relief to stimulate private contributions to support heritage have been criticized as a subsidy to the rich paid by the poor and are politically controversial. The second is that the effective use of subsidies runs up against the ‘principal-agent problem’. The ‘principal’ — the government central or local — must be assured that the ‘agent’ can provide information on the link between agreed targets and the amount of subsidy, and has a proper monitoring system in place. The fact that this information can normally only be given by the agent, an interested party, means that any ‘contract’ between the two entails a bargaining situation with the consequential difficulties of additional costs and delay in reaching agreement.Less
Public intervention to promote heritage services is usually justified by assuming that the market fails to provide some ‘optimum’ level of provision. As argued in Chapter 2, even meeting the requirements of consumer sovereignty offers reasons for intervention. In practice governments can use a variety of measures to ‘correct’ the market. They can influence heritage provision by such positive incentives as loans or grants, and tax relief and regulatory regimes that induce providers to direct their operations towards public objectives, as required by planning restrictions. There are two major problems about following a policy consistent operating through and not against the market. The first is avoiding side effects which make other policy objectives more difficult to reach, e.g., tax relief to stimulate private contributions to support heritage have been criticized as a subsidy to the rich paid by the poor and are politically controversial. The second is that the effective use of subsidies runs up against the ‘principal-agent problem’. The ‘principal’ — the government central or local — must be assured that the ‘agent’ can provide information on the link between agreed targets and the amount of subsidy, and has a proper monitoring system in place. The fact that this information can normally only be given by the agent, an interested party, means that any ‘contract’ between the two entails a bargaining situation with the consequential difficulties of additional costs and delay in reaching agreement.
Xavier Vives
- Published in print:
- 2016
- Published Online:
- January 2018
- ISBN:
- 9780691171791
- eISBN:
- 9781400880904
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691171791.003.0004
- Subject:
- Business and Management, Finance, Accounting, and Banking
This chapter presents the core analysis of competition in the banking sector based on the industrial organization (IO) approach. It examines both theoretical and empirical aspects as well as at the ...
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This chapter presents the core analysis of competition in the banking sector based on the industrial organization (IO) approach. It examines both theoretical and empirical aspects as well as at the special problems in analyzing the sector. This includes studying pricing, product differentiation, frictions, network externalities and two-sided markets, market structure, and mergers. The validity of the Structure–Conduct–Performance paradigm for banking is tested and the contributions of the new empirical IO is explained. The effects of asymmetric information and deregulation are also discussed. The chapter concludes with an assessment of behavioral biases of consumers and investors, along with their effects on the strategies of banks, competition, and welfare.Less
This chapter presents the core analysis of competition in the banking sector based on the industrial organization (IO) approach. It examines both theoretical and empirical aspects as well as at the special problems in analyzing the sector. This includes studying pricing, product differentiation, frictions, network externalities and two-sided markets, market structure, and mergers. The validity of the Structure–Conduct–Performance paradigm for banking is tested and the contributions of the new empirical IO is explained. The effects of asymmetric information and deregulation are also discussed. The chapter concludes with an assessment of behavioral biases of consumers and investors, along with their effects on the strategies of banks, competition, and welfare.
Rajat Acharyya and Saibal Kar
- Published in print:
- 2014
- Published Online:
- September 2014
- ISBN:
- 9780199672851
- eISBN:
- 9780191783081
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199672851.003.0007
- Subject:
- Economics and Finance, Development, Growth, and Environmental, Macro- and Monetary Economics
It would be erroneous to conceive that the positive effects of international trade and factor mobility are contained within the boundaries of the developing countries. An important issue that is ...
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It would be erroneous to conceive that the positive effects of international trade and factor mobility are contained within the boundaries of the developing countries. An important issue that is central to factor mobility, in particular labour mobility given the current trend of the South-to-North migration pattern, is how the immigrants perform in the developed world. This chapter argues that one core element in the entire mechanism that can significantly explain both has thus far not received the adequate attention it deserves. The chapter shows that the existence of asymmetric information in cross-border labour markets is such an element that strongly influences the choice of occupation among immigrants in favour of self-employment/entrepreneurship and subsequently acts as a strong catalyst in favour of catching-up economically.Less
It would be erroneous to conceive that the positive effects of international trade and factor mobility are contained within the boundaries of the developing countries. An important issue that is central to factor mobility, in particular labour mobility given the current trend of the South-to-North migration pattern, is how the immigrants perform in the developed world. This chapter argues that one core element in the entire mechanism that can significantly explain both has thus far not received the adequate attention it deserves. The chapter shows that the existence of asymmetric information in cross-border labour markets is such an element that strongly influences the choice of occupation among immigrants in favour of self-employment/entrepreneurship and subsequently acts as a strong catalyst in favour of catching-up economically.
Thierry Foucault, Marco Pagano, and Ailsa Röell
- Published in print:
- 2013
- Published Online:
- September 2013
- ISBN:
- 9780199936243
- eISBN:
- 9780199333059
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199936243.003.0005
- Subject:
- Economics and Finance, Financial Economics
This chapter provides a framework for analyzing the determinants of market depth (i.e., how and why transaction prices react to order size). Market depth depends on three of the factors that affect ...
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This chapter provides a framework for analyzing the determinants of market depth (i.e., how and why transaction prices react to order size). Market depth depends on three of the factors that affect the bid-spread: asymmetric information, risk aversion, and rents due to imperfect competition among market makers. Section 4.2 presents these ideas, building upon one of the most popular models of price formation under asymmetric information: the static version of the Kyle (1985) model of informed trading and market liquidity. The model is extended to imperfectly competitive market-making, in the context of a call market, where all traders submit supply or demand schedules and a Walrasian auctioneer crosses them at a common market-clearing price. Section 4.3 analyzes a call market where market makers have inventory concerns, being risk averse. It shows that in this setting the price impact of orders is increasing in order size, and depends on the underlying volatility of the stock and the risk aversion and market power of the market makers. The final sections provide suggestions for further reading and exercises.Less
This chapter provides a framework for analyzing the determinants of market depth (i.e., how and why transaction prices react to order size). Market depth depends on three of the factors that affect the bid-spread: asymmetric information, risk aversion, and rents due to imperfect competition among market makers. Section 4.2 presents these ideas, building upon one of the most popular models of price formation under asymmetric information: the static version of the Kyle (1985) model of informed trading and market liquidity. The model is extended to imperfectly competitive market-making, in the context of a call market, where all traders submit supply or demand schedules and a Walrasian auctioneer crosses them at a common market-clearing price. Section 4.3 analyzes a call market where market makers have inventory concerns, being risk averse. It shows that in this setting the price impact of orders is increasing in order size, and depends on the underlying volatility of the stock and the risk aversion and market power of the market makers. The final sections provide suggestions for further reading and exercises.
André Orléan
- Published in print:
- 2014
- Published Online:
- January 2015
- ISBN:
- 9780262026970
- eISBN:
- 9780262323901
- Item type:
- chapter
- Publisher:
- The MIT Press
- DOI:
- 10.7551/mitpress/9780262026970.003.0003
- Subject:
- Economics and Finance, Financial Economics
Neoclassical theory proceeds from an analysis of individual preferences, a set of objective facts about which economics has nothing to say. From this arises the doctrine of the utilitarian ...
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Neoclassical theory proceeds from an analysis of individual preferences, a set of objective facts about which economics has nothing to say. From this arises the doctrine of the utilitarian relationship to things and the problem of general equilibrium. Walrasian adjustment and mediation by price is discussed. Girard's notion of mimetic desire is extended to the analysis of economic behavior, and the relevance of asymmetric information, quality, and conventions explored. The future as a source of uncertainty and risk is examined in relation to the role of money in neoclassical theory, and four postulates constituting what is called market objectivity are stated. The underlying logic of neoclassical theory is elucidated in terms of the ideal-type analysis devised by Weber and applied to economics by Walras.Less
Neoclassical theory proceeds from an analysis of individual preferences, a set of objective facts about which economics has nothing to say. From this arises the doctrine of the utilitarian relationship to things and the problem of general equilibrium. Walrasian adjustment and mediation by price is discussed. Girard's notion of mimetic desire is extended to the analysis of economic behavior, and the relevance of asymmetric information, quality, and conventions explored. The future as a source of uncertainty and risk is examined in relation to the role of money in neoclassical theory, and four postulates constituting what is called market objectivity are stated. The underlying logic of neoclassical theory is elucidated in terms of the ideal-type analysis devised by Weber and applied to economics by Walras.
Howard Bodenhorn
- Published in print:
- 2002
- Published Online:
- November 2003
- ISBN:
- 9780195147766
- eISBN:
- 9780199832910
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0195147766.003.0004
- Subject:
- Economics and Finance, Economic History
New England banks were smaller than banks in other regions of the United States and they were more likely to be run by families. The region's banks were not impersonal dispensers of credit in ...
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New England banks were smaller than banks in other regions of the United States and they were more likely to be run by families. The region's banks were not impersonal dispensers of credit in anonymous markets. Rather, they were formed and served as the financial arms of extended kinship networks of several interrelated businesses. The insider nature of New England's small banks resolved a number of information asymmetry and agency problems. Small groups of large shareholders were well‐positioned to evaluate the prospects of borrowers and provided effective monitoring of bank management.Less
New England banks were smaller than banks in other regions of the United States and they were more likely to be run by families. The region's banks were not impersonal dispensers of credit in anonymous markets. Rather, they were formed and served as the financial arms of extended kinship networks of several interrelated businesses. The insider nature of New England's small banks resolved a number of information asymmetry and agency problems. Small groups of large shareholders were well‐positioned to evaluate the prospects of borrowers and provided effective monitoring of bank management.
- Published in print:
- 2008
- Published Online:
- March 2013
- ISBN:
- 9780226071633
- eISBN:
- 9780226071657
- Item type:
- chapter
- Publisher:
- University of Chicago Press
- DOI:
- 10.7208/chicago/9780226071657.003.0005
- Subject:
- History, Military History
Italian city-states attempted to overcome hidden action problems that came from contracts with condottieri. The theory of asymmetric information, at least the economic part of it, provides a rich ...
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Italian city-states attempted to overcome hidden action problems that came from contracts with condottieri. The theory of asymmetric information, at least the economic part of it, provides a rich tapestry by which to read history. This chapter examines elements of the hidden characteristics aspect of asymmetric information by focusing on the Age of Revolution (1789–1914). It discusses information and warfare in general terms before turning to the American Civil War and analyzing specific eastern campaigns in that war. The combatants in the east were well balanced; the Union had the numerical advantage, while the Confederates could wage a strategically defensive war aided by Virginia's formidable geographical obstacles. This chapter also suggests possible applications of the other principles of economics employed in this book to the American Civil War (opportunity cost, expected marginal costs and benefits, substitution, diminishing marginal returns, hidden action).Less
Italian city-states attempted to overcome hidden action problems that came from contracts with condottieri. The theory of asymmetric information, at least the economic part of it, provides a rich tapestry by which to read history. This chapter examines elements of the hidden characteristics aspect of asymmetric information by focusing on the Age of Revolution (1789–1914). It discusses information and warfare in general terms before turning to the American Civil War and analyzing specific eastern campaigns in that war. The combatants in the east were well balanced; the Union had the numerical advantage, while the Confederates could wage a strategically defensive war aided by Virginia's formidable geographical obstacles. This chapter also suggests possible applications of the other principles of economics employed in this book to the American Civil War (opportunity cost, expected marginal costs and benefits, substitution, diminishing marginal returns, hidden action).
Frederic S. Mishkin
- Published in print:
- 2002
- Published Online:
- February 2013
- ISBN:
- 9780226531885
- eISBN:
- 9780226531939
- Item type:
- chapter
- Publisher:
- University of Chicago Press
- DOI:
- 10.7208/chicago/9780226531939.003.0001
- Subject:
- Economics and Finance, Financial Economics
Prudential supervision, broadly construed, involves government regulation and monitoring of the banking system to ensure its safety and soundness. This chapter addresses the following questions: Why ...
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Prudential supervision, broadly construed, involves government regulation and monitoring of the banking system to ensure its safety and soundness. This chapter addresses the following questions: Why is prudential supervision so important, and why does it take the form it does? It first outlines what problems asymmetric information creates for the financial system and shows that the presence of asymmetric information explains why banks are so important. It then explains why prudential supervision of these institutions is needed, and what forms it takes. The chapter concludes by outlining the key issues in the design of prudential supervision and uses them to organize a general discussion of the chapters in this volume, providing a brief overview of their contents. The linkages between these chapters are explored in order to highlight some general conclusions.Less
Prudential supervision, broadly construed, involves government regulation and monitoring of the banking system to ensure its safety and soundness. This chapter addresses the following questions: Why is prudential supervision so important, and why does it take the form it does? It first outlines what problems asymmetric information creates for the financial system and shows that the presence of asymmetric information explains why banks are so important. It then explains why prudential supervision of these institutions is needed, and what forms it takes. The chapter concludes by outlining the key issues in the design of prudential supervision and uses them to organize a general discussion of the chapters in this volume, providing a brief overview of their contents. The linkages between these chapters are explored in order to highlight some general conclusions.
