Abstract
So far we have assumed common knowledge about the (state-contingent) pay-offs of assets. Imagine now that some agents know the payoffs better than others. Then – besides intertemporal substitution, risk sharing and betting on the occurrence of the states of the world – a seller of an asset might want to sell it because he knows it has very low pay-offs. Anticipating this no agent would buy at a price allowing the seller to make a profit and ultimately no transaction is made. In the subprime mortgage crisis this aspect of asset markets became overwhelming so that asset markets broke down completely.
All of the books in the world contain no more information than is broadcast as video in a single large American city in a single year – Not all bits have equal value. Carl Sagan
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
More information on information revealed by prices is revealed in [GH90].
- 2.
Risk-neutrality is just a simplification. The statements easily carry over to a setting with risk-averse agents.
- 3.
In fact Bayes’ rule states that \(\text{posterior} = \text{conditional likelihood} \cdot \text{prior}/\text{likelihood}\), in symbols \(\mathcal{P}(R = r\vert e) = \mathcal{P}(e\vert R = r) \cdot \mathcal{P}(R = r)/\mathcal{P}(e)\), where \(\mathcal{P}(R = r\vert e)\) denotes the probability that a random variable R takes the value r, given the signal e.
- 4.
The bank can force its own conditions on the firm, because it is the only potential financier but not obliged to grant any credit. It is only limited by the firm’s willingness to participate. Therefore it needs to choose conditions such that the firm is still interested.
- 5.
Compare [GH85] for further information.
References
G.A. Akerlof, The Market for “Lemons”: Quality Uncertainty and the Market Mechanisms, The Quarterly Journal of Economics 84 (1970), no. 3, 488–500.
S. Bikhchandani, D. Hirshleifer, and I. Welch, Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades, The Journal of Economic Perspectives 12 (1998), no. 3, 151–170.
D. Gale and M. Hellwig, Incentive-Compatible Debt Contracts: The One-Period Problem, The Review of Economic Studies 52 (1985), no. 4, 647–663.
G.M. Grossman and E. Helpman, Trade, Innovation, and Growth, The American Economic Review 80 (1990), no. 2, 86–91.
S.J. Grossman and J.E. Stiglitz, On the Impossibility of Informationally Efficient Markets, The American Economic Review 70 (1980), no. 3, 393–408.
Zahlen bitte – Untreue Ehemänner, NZZ-Folio (12/2000).
M. Rothschild and J. Stiglitz, Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information, The Quarterly Journal of Economics 90 (1976), no. 4, 629–649.
Author information
Authors and Affiliations
Rights and permissions
Copyright information
© 2016 Springer-Verlag Berlin Heidelberg
About this chapter
Cite this chapter
Hens, T., Rieger, M.O. (2016). Information Asymmetries on Financial Markets. In: Financial Economics. Springer Texts in Business and Economics. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-49688-6_7
Download citation
DOI: https://doi.org/10.1007/978-3-662-49688-6_7
Published:
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-662-49686-2
Online ISBN: 978-3-662-49688-6
eBook Packages: Economics and FinanceEconomics and Finance (R0)