Benchmarking and Comparing Entrepreneurs with Incomplete Information
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.
Volume (Year): 20 (2007)
Issue (Month): 2 (Autumn)
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