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Ignorant Experts and Financial Fragility

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  • Asano, Koji

Abstract

We study debt funding markets in which lenders can invest in financial expertise to reduce a cost of acquiring information about the underlying collateral. If the pledgeability of corporate income is low, lenders' information acquisition enhances liquidity, but they reduce expertise acquisition because of a hold-up problem. By contrast, if the pledgeability is high, information acquisition reduces liquidity, so that lenders can extract rents from firms by investing in expertise and creating fear of illiquidity. In this case, as information about collateral decays over time, there is growth in credit and expertise acquisition, making the economy more vulnerable to an aggregate shock. These results suggest that the growth of the financial sector is associated with prevalence of opaque assets and a subsequent crisis.

Suggested Citation

  • Asano, Koji, 2018. "Ignorant Experts and Financial Fragility," MPRA Paper 90830, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:90830
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    References listed on IDEAS

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    More about this item

    Keywords

    expertise; collateral; information acquisition; information sensitivity; liquidity;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises

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