ECON 3K03 Lecture Notes - Lecture 8: Financial Repression, Management, Incentive Compatibility
8 Feb 2015
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Document Summary
The economics of money, banking, and financial markets. Eight basic facts: stocks are not the most important sources of external financing for businesses. Issuing marketable debt and equity securities is not the primary way in which businesses finance their operations. Indirect finance is many times more important than direct finance: financial intermediaries, particularly banks, are the most important source of external funds used to finance businesses. Transaction costs: transaction costs are a major problem in financial markets. E. g. brokerage fees: financial intermediaries have evolved to reduce transaction costs. Moral hazard: asymmetric information: one party has insufficient knowledge about the other party involved in a transaction. Two types of asymmetric information: adverse selection occurs before the transaction, moral hazard arises after the transaction, agency theory analyses how asymmetric information problems affect economic behaviour. Tools to help solve adverse selection problems: private production and sale of information. Free-rider problem: government regulation to increase information.
