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De-regulating Markets for Financial Information

Author

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  • Laura Veldkamp

    (NYU Stern)

  • Pablo Kurlat

    (Stanford)

Abstract

In October 2009, the house financial services committee voted to study the effects of removing ratings requirements for credit products. Eliminating such requirements would allow the issuers of credit products to decide whether or not to pay a ratings agency to rate their asset. If such a rating was not provided by the asset issuer, investors themselves might purchase a rating. This paper studies the circumstances under which free markets for information will provide information, in the absence of government mandates and the efficiency properties of each regime. Although government regulation requires too much information for some assets and too little for others, private markets also suffer from inefficiencies stemming from the non-concave nature of information production. The results inform the debate about how and when to require information provision for a wide range of financial and non-financial products.

Suggested Citation

  • Laura Veldkamp & Pablo Kurlat, 2011. "De-regulating Markets for Financial Information," 2011 Meeting Papers 1269, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:1269
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    File URL: https://economicdynamics.org/meetpapers/2011/paper_1269.pdf
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    References listed on IDEAS

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    1. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    2. Skreta, Vasiliki & Veldkamp, Laura, 2009. "Ratings shopping and asset complexity: A theory of ratings inflation," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 678-695, July.
    3. Bolton, Patrick & Freixas, Xavier & Shapiro, Joel, 2007. "Conflicts of interest, information provision, and competition in the financial services industry," Journal of Financial Economics, Elsevier, vol. 85(2), pages 297-330, August.
    4. Diamond, Douglas W, 1985. " Optimal Release of Information by Firms," Journal of Finance, American Finance Association, vol. 40(4), pages 1071-1094, September.
    5. George-Marios Angeletos & Guido Lorenzoni & Alessandro Pavan, 2010. "Beauty Contests and "Irrational Exuberance": A Neoclassical Approach," Discussion Papers 1502, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    6. Laura L. Veldkamp, 2006. "Media Frenzies in Markets for Financial Information," American Economic Review, American Economic Association, vol. 96(3), pages 577-601, June.
    7. Joël Peress, 2004. "Wealth, Information Acquisition, and Portfolio Choice," Review of Financial Studies, Society for Financial Studies, vol. 17(3), pages 879-914.
    8. Boyan Jovanovic, 1982. "Truthful Disclosure of Information," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 36-44, Spring.
    9. Steven Shavell, 1994. "Acquisition and Disclosure of Information Prior to Sale," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 20-36, Spring.
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