Individuals, Regulators, & Financial Institutions
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Could you please give me 3 examples with explanation of how asymmetric information (among any combination of individuals, financial institutions, regulators, and other players) led to the crises associated with the current economic climate? If you have any citations, could you please include them as well?
Thank you in advance!
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Solution Summary
Three examples with explanation of how asymmetric information (among any combination of individuals, financial institutions, regulators, and other players) led to the crises associated with the current economic climat
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Asymmetric information is the bane and savior of financial systems - it is how money is made (through arbitrage) but it also a key area targeted by regulators, as "inside" information can unduly advantage insiders at the expense of the broader market. An older NBER paper looking at the role of asymmetric information and crises can be found at: http://www.nber.org/chapters/c11483.pdf.
In regards to the current financial crisis, asymmetric information played an important role in many areas:
1. Banks held information regarding their exposure to sub-prime mortgages and other "assets" that were not necessarily shared with regulators or with the public at large, whether through current accounting standards, accounting chicanery, malfeasance, or other factors (including the banks not knowing how "toxic" their assets actually were). ...
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