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Chapter 8: Q.4 (page 235)

Why are financial intermediaries willing to engage in information collection activities when investors in financial instruments may be unwilling to do so?

Short Answer

Expert verified

Financial intermediaries are eager to participate in data collecting initiatives by disclosing information about their operations since it will allow them to benefit from the data gathered from other financial intermediaries.

Step by step solution

01

Introduction

Financial intermediaries are institutions or enterprises that operate as a middleman, accepting cash from the general public and then lending them to businesses or individuals that need money.
The free-rider dilemma describes the situation in which some people receive knowledge for free while others must pay for it.
02

Explanation

Financial intermediaries are eager to participate in data collecting initiatives by disclosing information about their operations, since this will allow them to benefit from the data gathered from other financial intermediaries.
Investors are reluctant to share information in order to prevent a free-rider problem, as they invest in individual securities and other investors will benefit from the knowledge at no cost to them.

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Most popular questions from this chapter

Go to the St. Louis Federal Reserve FRED database and find data on net worth of households (TNWBSHNO) and the net percentage of domestic banks tightening standards for auto loans (STDSAUTO). Adjust the units setting for the net worth indicator to “Percent Change from Year Ago,” and download the data into a spreadsheet.

a. Calculate the average, over the most recent four quarters and the four quarters prior to that, for the bank standards indicator and the “percent change in net worth” indicator. Do these averages behave as you would expect?

b. Use the Data Analysis tool in Excel to calculate the correlation coefficient for the two data series from 2011:Q2 to the most recent quarter of data available. What can you conclude about the relationship between the net worth of households and bank auto lending standards? Is this result consistent with efforts to reduce asymmetric information?

You own a house worth $800,000 that is located on a river bank. If the river floods moderately, the house will be completely destroyed. This happens about once every 50 years. If you build a seawall, the river would have to flood heavily to destroy your house, which only happens about once every 200 years. What would be the annual premium for a flood insurance policy that offers full insurance? For a policy that pays only 70% of the home value, what are your expected costs with and without a seawall? Do the different policies provide an incentive to be safer (i.e., to build the seawall) ?

How can the existence of asymmetric information provide a rationale for government regulation of financial markets?

How can asymmetric information problems lead to a bank panic?

How do standardized accounting principles help financial markets work more efficiently?
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