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Benchmarking and Comparing Entrepreneurs with Incomplete Information

  • Juha-Pekka Niinimäki

    ()

    (Helsinki School of Economics, Department of Economics, Finland)

  • Tuomas Takalo

    ()

    (Monetary Policy and Research Department, Bank of Finland, Finland)

This paper studies how the creation of (ex ante) benchmarks and rankings can be used to provide information in financial markets. Although an investor cannot precisely estimate the future returns of an entrepreneur’s projects, the investor can mitigate the incomplete information problem by comparing different entrepreneurs and financing only the very best ones. Incomplete information can be eliminated with certainty if the number of compared projects is sufficiently large. Because the possibility to make benchmarks and comparisons favours centralised information gathering, it creates a novel rationale for the establishment of a financial intermediary.

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Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

Volume (Year): 20 (2007)
Issue (Month): 2 (Autumn)
Pages: 91-107

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Handle: RePEc:fep:journl:v:20:y:2007:i:2:p:91-107
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  1. Hellwig, Martin, 1998. "Financial intermediation with risk aversion," Papers 98-39, Sonderforschungsbreich 504.
  2. Allen N. Berger & W. Scott Frame & Nathan H. Miller, 2002. "Credit scoring and the availability, price, and risk of small business credit," FRB Atlanta Working Paper 2002-6, Federal Reserve Bank of Atlanta.
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  7. HEGE, Ulrich & BERGEMANN, Dirk, 2002. "The value of benchmarking," Les Cahiers de Recherche 752, HEC Paris.
  8. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September.
  9. Bergemann, Dirk & Hege, Ulrich, 1998. "Venture capital financing, moral hazard, and learning," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 703-735, August.
  10. Niinimaki, J. -P., 2001. "Intertemporal diversification in financial intermediation," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 965-991, May.
  11. Blochlinger, Andreas & Leippold, Markus, 2006. "Economic benefit of powerful credit scoring," Journal of Banking & Finance, Elsevier, vol. 30(3), pages 851-873, March.
  12. Cerasi, Vittoria & Daltung, Sonja, 2000. "The optimal size of a bank: Costs and benefits of diversification," European Economic Review, Elsevier, vol. 44(9), pages 1701-1726, October.
  13. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
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