The role of comparing in financial markets with hidden information
AbstractThis paper studies how comparing can be used to provide information in financial markets in the presence of a hidden characteristics problem. Although an investor cannot precisely estimate the future returns of an entrepreneur’s projects, the investor can mitigate the asymmetric information problem by ranking different entrepreneurs and financing only the very best ones. Information asymmetry can be eliminated with certainty if the number of compared projects is sufficiently large. Because comparing favours centralised information gathering, it creates a novel rationale for the establishment of a financial intermediary.
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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 1/2006.
Length: 41 pages
Date of creation: 01 Jan 2006
Date of revision:
asymmetric information; banking; corporate finance; financial intermediation; ranking; venture capital;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-21 (All new papers)
- NEP-CFN-2006-10-21 (Corporate Finance)
- NEP-ENT-2006-10-21 (Entrepreneurship)
- NEP-FIN-2006-10-21 (Finance)
- NEP-FMK-2006-10-21 (Financial Markets)
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