ECON 305 Lecture Notes - Lecture 8: Quarterly Journal Of Economics, George Akerlof, Management

• School: University of Victoria
• Department: Economics
• Course: ECON 305
• Professor: Omar

Document Summary

Econ 305 chapter 8 an economic analysis of financial structure. Transaction costs: tra(cid:374)sa(cid:272)tio(cid:374) (cid:272)osts are a (cid:373)ajor pro(cid:271)le(cid:373) i(cid:374) fi(cid:374)a(cid:374)(cid:272)ial (cid:373)arkets. E. g. brokerage fees: fi(cid:374)a(cid:374)(cid:272)ial i(cid:374)ter(cid:373)ediaries have evolved to redu(cid:272)e tra(cid:374)sa(cid:272)tio(cid:374) (cid:272)osts. Moral hazard: asymmetric information: one party has insufficient knowledge about the other party involved in a transaction. Adverse selection the lemons problem: george akerlof, the market for lemons, qje (1970) In case of default the lender can seize the collateral and sell it to recuperate the investment. Problem arises when we can"t observe people"s actions can"t distinguish poor performance from bad luck: called the principal-agent problem. Principal: less information (stockholder) agent: more information (manager: separation of ownership and control of the firm. Managers pursue personal benefits and power rather than the profitability of the firm. Fact1: government regulation to increase information fact5, financial intermediation(venture capital) fact3, debt contracts(periodic payments) fact1.