ECN 506 Lecture Notes - Lecture 8: Free Rider Problem, Financial Repression, Quarterly Journal Of Economics
28 Mar 2018
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Document Summary
The design of financial structure to promote economic efficiency. The link between the financial system and the performance of the aggregate economy. Financial system means more than just banks. Transaction costs are a major problem in financial markets: brokerage feeds, for example. Inability to diversify will subject you to risk. Financial intermediaries have evolved to reduce transaction costs: economies of scale, expertise. Asymmetric information: one party has insufficient knowledge about the other party involved in a transaction. Two types of asymmetric information: adverse selection occurs before the transaction, moral hazard arises after the transaction. Agency theory analyses how asymmetric information problems affect economic behavior. George akerlof, the market for lemons, qje (1970) If quality cannot be assessed, the buyer is willing to pay at most a price that reflects the average quality. Sellers of good quality items will not want to sell at the price for average quality.
