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The Social Value of Financial Expertise

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  • Pablo Kurlat

Abstract

I study expertise acquisition in a model of trading under asymmetric information. I propose and implement a method to measure r, the ratio of the marginal social value to the marginal private value of expertise. This can be decomposed into three sufficient statistics: traders' average profits, the fraction of bad assets among traded assets, and the elasticity of good assets traded with respect to capital inflows. I measure r = 0.16 for the junk bond underwriting market. Since this is less than 1, it implies that marginal investments in expertise destroy surplus.

Suggested Citation

  • Pablo Kurlat, 2019. "The Social Value of Financial Expertise," American Economic Review, American Economic Association, vol. 109(2), pages 556-590, February.
    • Handle: RePEc:aea:aecrev:v:109:y:2019:i:2:p:556-90
    Note: DOI: 10.1257/aer.20171735
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    Cited by:

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    3. Tobias Dieler & Sonny Biswas & Giacomo Calzolari & Fabio Castiglionesi, 2023. "Asset Trade, Real Investment, and a Tilting Financial Transaction Tax," Management Science, INFORMS, vol. 69(4), pages 2401-2424, April.
    4. Laurent Barras & Patrick Gagliardini & Olivier Scaillet, 2022. "Skill, Scale, and Value Creation in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 77(1), pages 601-638, February.
    5. Kirill Shakhnov, 2022. "The Allocation of Talent: Finance versus Entrepreneurship," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 46, pages 161-195, October.
    6. Asano, Koji, 2024. "Ignorant experts and financial fragility," The North American Journal of Economics and Finance, Elsevier, vol. 74(C).
    7. Kurlat, Pablo, 2021. "Investment externalities in models of fire sales," Journal of Monetary Economics, Elsevier, vol. 122(C), pages 102-118.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L84 - Industrial Organization - - Industry Studies: Services - - - Personal, Professional, and Business Services

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