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Moral Hazard and Information Sharing: A Model of Financial Information Gathering Agencies

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  • Marcia H. Millon

    (Boston College)

  • Anjan V. Thakor

    (Olin School of Business, Washington University)

Abstract

We propose a theory of information gathering agencies in a world of informational asymmetries and moral hazard. In a setting in which true firm values are certified by screening agents whose payoffs depend on noisy ex post monitors of information quality, the formation of information gathering agencies (groups of screening agents) is justified on two grounds. First, it enables screening agents to diversify their risky payoffs. Second, it allows information sharing. The first effect itself is insufficient despite the risk aversion of screening agents and the stochastic independence of the monitors used to compensate them.

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File URL: http://128.118.178.162/eps/fin/papers/0411/0411024.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0411024.

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Length: 21 pages
Date of creation: 10 Nov 2004
Date of revision:
Handle: RePEc:wpa:wuwpfi:0411024

Note: Type of Document - pdf; pages: 21
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Web page: http://128.118.178.162

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  1. Diamond, Douglas W & Verrecchia, Robert E, 1982. " Optimal Managerial Contracts and Equilibrium Security Prices," Journal of Finance, American Finance Association, vol. 37(2), pages 275-87, May.
  2. Baron, David P, 1979. "On the Relationship between Complete and Incomplete Financial Market Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(1), pages 105-17, February.
  3. Arrow, Kenneth J, 1974. "Limited Knowledge and Economic Analysis," American Economic Review, American Economic Association, vol. 64(1), pages 1-10, March.
  4. Gonedes, Nicholas J, 1976. "The Capital Market, the Market for Information, and External Accounting," Journal of Finance, American Finance Association, vol. 31(2), pages 611-30, May.
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