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The role of comparing in financial markets with hidden information

  • Niinimäki, Juha-Pekka


    (Department of Economics, Helsinki School of Economics)

  • Takalo, Tuomas


    (Bank of Finland Research)

  • Kultti, Klaus

    (Department of Economics, University of Helsinki)

This paper studies how comparing can be used to provide information in financial markets in the presence of a hidden characteristics problem. Although an investor cannot precisely estimate the future returns of an entrepreneur’s projects, the investor can mitigate the asymmetric information problem by ranking different entrepreneurs and financing only the very best ones. Information asymmetry can be eliminated with certainty if the number of compared projects is sufficiently large. Because comparing favours centralised information gathering, it creates a novel rationale for the establishment of a financial intermediary.

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Paper provided by Bank of Finland in its series Research Discussion Papers with number 1/2006.

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Length: 41 pages
Date of creation: 01 Jan 2006
Date of revision:
Handle: RePEc:hhs:bofrdp:2006_001
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
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  1. Bergemann, Dirk & Hege, Ulrich, 1997. "Venture Capital Financing, Moral Hazard and Learning," CEPR Discussion Papers 1738, C.E.P.R. Discussion Papers.
  2. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  3. Ramakrishnan, Ram T S & Thakor, Anjan V, 1984. "Information Reliability and a Theory of Financial Intermediation," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 415-32, July.
  4. 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.
  5. Jappelli, Tullio & Pagano, Marco, 1991. "Information Sharing in Credit Markets," CEPR Discussion Papers 579, C.E.P.R. Discussion Papers.
  6. 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.
  7. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  8. Gary Gorton & Andrew Winton, 2002. "Financial Intermediation," NBER Working Papers 8928, National Bureau of Economic Research, Inc.
  9. Hellwig, Martin F, 2000. "Financial Intermediation with Risk Aversion," Review of Economic Studies, Wiley Blackwell, vol. 67(4), pages 719-42, October.
  10. V. Cerasi & S. Daltung, 1995. "The Optimal Size of a Bank: Costs and Benefits of Diversification," Departmental Working Papers 1995-05, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
  11. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, vol. 58(2), pages 429-52, March.
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