The impact of asymmetric information about collateral values in mortgage lending
Johannes Stroebel, 13 December 2012
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.
The mortgage market was the starting point for several of the post-Lehman crises: the subprime crisis, the Irish crisis, the Spanish crisis, and many more. It is a market typified by massive information asymmetries, and it has been argued that a market based on highly asymmetric information contributed to the buildup of bad mortgage debt during the first half of the last decade.
Topics: Global crisis, Macroeconomic policy
Tags: asymmetric information, global crisis, subprime crisis
How can Bill and Melinda Gates increase other people's donations to fund public goods?
Dean Karlan, John List, 2 April 2012
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.
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Topics: Development, Poverty and income inequality
Tags: asymmetric information, charitable giving, charity, Public goods
Rent capture through financial innovation
Bruno Biais, Jean-Charles Rochet, Paul Woolley, 25 March 2010
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.
Financial institutions can create frictions. Until recently, economic theory had paid relatively little attention to this possibility. For example, asset pricing theory often assumes that prices are set directly by the "representative household", treating the finance sector as an efficient pass-through.
Topics: Financial markets, Global crisis
Tags: asymmetric information, financial crises, financial regulation
Information and illegal market mechanisms
Trevon D. Logan, Manisha Shah, 25 April 2009
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.
Economists have coalesced around the view that institutional design can help overcome problems of asymmetric information.
Topics: Institutions and economics
Tags: asymmetric information, contract enforcement, institutions
The economics of labour market intermediation
David Autor, 30 October 2008
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.
The labour market depicted by undergraduate textbooks (e.g. Mankiw 2006) is a pure spot market with complete information and atomistic price-taking. Labour economists have long understood that this model is highly incomplete.
Topics: Labour markets
Tags: asymmetric information, labour market intermediaries, Labour Markets
Bagehot, central banking, and the financial crisis
Xavier Vives, 31 March 2008
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.
The present financial crisis poses two main questions: whether it is similar to past crises and how central banks should intervene to preserve the stability of the system.
Topics: Financial markets
Tags: asymmetric information, Central Banks, financial stability, liquidity, subprime crisis