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The role of comparing in financial markets with hidden information

Author

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  • Niinimäki, Juha-Pekka
  • Takalo, Tuomas
  • Kultti, Klaus

Abstract

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.

Suggested Citation

  • Niinimäki, Juha-Pekka & Takalo, Tuomas & Kultti, Klaus, 2006. "The role of comparing in financial markets with hidden information," Bank of Finland Research Discussion Papers 1/2006, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2006_001
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    asymmetric information; banking; corporate finance; financial intermediation; ranking; venture capital;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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