Many studies argue that asymmetric information plays a key role in lending markets. This column presents new evidence on asymmetric information and imperfect competition on the Italian lending market. An increase in adverse selection causes most of the prices in the sample to increase, most of the quantities to fall, and most of the defaults to rise. However, there is substantial heterogeneity in the response to a rise in adverse selection. Market power could be an explanation why some markets can absorb such shocks better than others.
Gregory Crawford, Nicola Pavanini, Fabiano Schivardi, Thursday, April 30, 2015 - 00:00
Darrell Duffie , Piotr Dworczak, Haoxiang Zhu, Monday, February 16, 2015 - 00:00
Kuniyoshi Saito, Daisuke Tsuruta, Friday, November 14, 2014 - 00:00
Joanne Lindley, Steven McIntosh, Sunday, September 21, 2014 - 00:00
Bruno Biais, Jean-Charles Rochet, Paul Woolley, Thursday, August 21, 2014 - 00:00
The Global Crisis has intensified debates over the merits of financial innovation and the optimal size of the financial sector. This column presents a model in which the growth of finance is driven by the development of a financial innovation. The model can help explain the securitised mortgage debacle that triggered the latest crisis, the tech bubble in the late 1990s, and junk bonds in the 1980s. A striking implication of the model is that regulation should be toughest when finance seems most robust and when innovations are waxing strongly.
Daniel Bennett, Wes Yin, Thursday, August 14, 2014 - 00:00
Many drugs sold in poor countries are counterfeit or substandard, endangering patients’ health and fostering drug resistance. Since drug quality is difficult to observe, pharmacies in weakly regulated markets may have little incentive to improve quality. However, larger markets allow firms to reorganise production and invest in technologies that reduce the marginal cost of quality. This column discusses how the entry of a new pharmacy chain in India led incumbents to both cut prices and raise drug quality.
Alex Edmans, William Mann, Saturday, February 15, 2014 - 00:00
All firms need capital. Much research addresses the choice between issuing various types of securities – for example, between issuing debt and equity. However, another method of financing has received relatively little attention – selling non-core assets, such as property, divisions, or financial investments. This article explains the conditions under which an asset sale is the preferred means of raising capital, and highlights how a manager should go about deciding between selling assets and issuing securities.
Johannes Stroebel, Thursday, December 13, 2012 - 00:00
Mortgage markets arguably spawned the post-Lehman crises – think subprime, Ireland, and Spain. This column argues that asymmetric information between competing lenders is an important feature in the financing of newly developed homes. Interestingly, lenders differ significantly in their information about true underlying housing collateral values. It is the identification of asymmetric information that allows policymakers to develop proposals that would improve how the market works and, with the right policies, how governments can limit the negative impact of asymmetry.
Dean Karlan, John List, Monday, April 2, 2012 - 00:00
With governments strapped for cash, charities are stepping up to provide public goods. But how can charities mobilise support from small donors to fund their work? CEPR DP8922 investigates whether altruists would donate more if they knew more about a charity’s quality. In the authors’ experiment, Bill and Melinda Gates matched donations to a particular charity. Small donors saw this as a signal of the charity’s quality – and donations soared.
Bruno Biais, Jean-Charles Rochet, Paul Woolley, Thursday, March 25, 2010 - 00:00
How does economic theory need to adjust in light of the global financial crisis? This column presents a new insight on how innovation leads to rent capture, which in turn is a sign of a potential crisis. This stems from asymmetric information in the financial sector. To avoid a repeat of the crisis, policymakers need to increase transparency.
Trevon D. Logan, Manisha Shah, Saturday, April 25, 2009 - 00:00
This column studies the online (illegal) market for male sex work. It shows that participants find ways to get the prices right, even in the absence of formal enforcement mechanisms, using technology to share and disseminate information. The risk of fraud is disciplined by client reviews and demand for photos in escorts’ advertisements.
David Autor, Thursday, October 30, 2008 - 00:00
The labour market suffers from asymmetric information, coordination, and collective action failures. This column explains how labour market intermediaries, such as online job boards and centralised job-matching institutions, work to improve labour market outcomes. These intermediaries will perform important coordinating functions even as information costs fall.
Xavier Vives, Monday, March 31, 2008 - 00:00
The current crisis is a modern form of a traditional banking crisis. The 125-year-old Bagehot's doctrine tells us how governments should react – lend to solvent but illiquid financial institutions. While easy to state, the doctrine is hard to apply. The key question to assess the future consequences of current central bank policy is whether the subprime mortgage crisis arises in the context of a moderate or a severe underlying moral hazard problem.