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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. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
  2. Hellwig, Martin, 1998. "Financial Intermediation with Risk Aversion," Sonderforschungsbereich 504 Publications 98-39, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  3. Gary Gorton & Andrew Winton, 2002. "Financial Intermediation," NBER Working Papers 8928, National Bureau of Economic Research, Inc.
  4. 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.
  5. Bergemann, Dirk & Hege, Ulrich, 1997. "Venture Capital Financing, Moral Hazard and Learning," CEPR Discussion Papers 1738, C.E.P.R. Discussion Papers.
  6. Niinimaki, J. -P., 2001. "Intertemporal diversification in financial intermediation," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 965-991, May.
  7. Allen N. Berger & W. Scott Frame & Nathan H. Miller, 2002. "Credit scoring and the availability, price, and risk of small business credit," Working Paper 2002-6, Federal Reserve Bank of Atlanta.
  8. Blochlinger, Andreas & Leippold, Markus, 2006. "Economic benefit of powerful credit scoring," Journal of Banking & Finance, Elsevier, vol. 30(3), pages 851-873, March.
  9. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  10. Dirk Bergemann & Ulrich Hege, 2002. "The Value of Benchmarking," Cowles Foundation Discussion Papers 1379, Cowles Foundation for Research in Economics, Yale University, revised Oct 2002.
  11. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, vol. 58(2), pages 429-52, March.
  12. 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.
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