Research Discussion Papers, Bank of Finland
No 1/2006:
The role of comparing in financial markets with hidden information
Juha-Pekka Niinimäki ()
, Tuomas Takalo ()
and Klaus Kultti
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.
Keywords: asymmetric information; banking; corporate finance; financial intermediation; ranking; venture capital; (follow links to similar papers)
JEL-Codes: G21; G24; (follow links to similar papers)
41 pages, January 1, 2006
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