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  • Free Rider Problem Aggravating Adverse Selection &amp Moral Hazard

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    Sandeep K Biswal
    60 visualizzazioni1 pagina
    The free-rider problem can exacerbate adverse selection and moral hazard problems in financial markets in two ways: 1) It weakens the ability of private firms to profit from selling information about companies. If fewer investors purchase this information, less of it will be produced, worsening the problem of adverse selection. 2) It reduces the amount of information stockholders produce about management and firm activities through costly audits and monitoring. Each stockholder is unwilling to invest in monitoring if others can free-ride, resulting in little information being produced. This aggravates the problem of moral hazard.

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    Free Rider Problem Aggravating Adverse Selection & Moral Hazard

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    The free-rider problem can exacerbate adverse selection and moral hazard problems in financial markets in two ways: 1) It weakens the ability of private firms to profit from selling information about companies. If fewer investors purchase this information, less of it will be produced, worsening the problem of adverse selection. 2) It reduces the amount of information stockholders produce about management and firm activities through costly audits and monitoring. Each stockholder is unwilling to invest in monitoring if others can free-ride, resulting in little information being produced. This aggravates the problem of moral hazard.

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    Attribution Non-Commercial (BY-NC)
    Scarica in formato DOCX, PDF, TXT o leggi online su Scribd
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    60 visualizzazioni1 pagina

    Free Rider Problem Aggravating Adverse Selection &amp Moral Hazard

    Caricato da

    Sandeep K Biswal
    The free-rider problem can exacerbate adverse selection and moral hazard problems in financial markets in two ways: 1) It weakens the ability of private firms to profit from selling information about companies. If fewer investors purchase this information, less of it will be produced, worsening the problem of adverse selection. 2) It reduces the amount of information stockholders produce about management and firm activities through costly audits and monitoring. Each stockholder is unwilling to invest in monitoring if others can free-ride, resulting in little information being produced. This aggravates the problem of moral hazard.

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    Attribution Non-Commercial (BY-NC)
    Scarica in formato DOCX, PDF, TXT o leggi online su Scribd
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    Q. Hnw dncs thc frcc-rIdcr prnb!cm aggravatc advcrsc sc!cctInn and mnra!

    hazard
    prnb!cms In fInancIa! markcts?

    Ans. As dosciilod in Mishkin on pago 189, ono pailiaI soIulion lo lho piolIon of
    Iondois (puichasois of socuiilios) having Ioss infoinalion lhan loiiovois of funds is lo
    havo piivalo conpanios coIIocl and pioduco infoinalion lhal hoIps Iondois dislinguish
    lolvoon good and lad fiins soIIing socuiilios. Tho fioo iidoi piolIon aiisos hoio vhon
    sono poopIo puichaso lho infoinalion aloul fiins and lho poopIo lhal do nol puichaso
    il lako advanlago of lho infoinalion lho olhois havo paid foi. Londois vho havo
    puichasod infoinalion viII puichaso socuiilios fion high quaIily, undoivaIuod fiins
    and in doing so viII iovoaI lo fioo-iiding invoslois vhich fiins aio lho onos lhoy shouId
    invosl in. If nany invoslois fioo iido, lhis viII push up lho piico of good fiins
    socuiilios and nako il Ioss piofilalIo lo puichaso infoinalion in lho fiisl pIaco. If nany
    invoslois find il unpiofilalIo lo puichaso infoinalion, lhon il nay nol lo galhoiod and
    pioducod ly piivalo fiins: Tho voakonod aliIily of piivalo fiins lo piofil fion soIIing
    infoinalion viII noan lhal Ioss infoinalion is pioducod in lho naikolpIaco, and so
    advoiso soIoclion (lho Ionons piolIon) viII sliII inloifoio vilh lho officionl funclioning
    of socuiilios naikols (Mishkin, p. 189).

    As dosciilod in Mishkin on pago 194, fioo iiding can aIso aggiavalo lho noiaI hazaid
    piolIon. Tho piincipIo-agonl piolIon is a piolIon of noiaI hazaid lhal occuis
    locauso nanagois havo noio infoinalion aloul lhoii aclivilios and acluaI piofils lhan
    slockhoIdois do. SlockhoIdois can pailiaIIy ovoicono lhis piolIon ly sponding lino
    and nonoy on fioquonl audils of lho fiins lhoy havo invoslod in and cIosoIy noniloiing
    vhal nanagononl is doing. SiniIai lo lho advoiso soIoclion caso, fioo iiding can ioduco
    lho anounl of infoinalion aloul nanagononl and fiin aclivilios pioducod ly
    slockhoIdois lhiough coslIy audils oi olhoi foins of noniloiing. Lach slockhoIdoi viII
    lo unviIIing lo invosl in noniloiing aclivilios, piofoiiing lo fioo iido on lho noniloiing
    oxpondiluios of olhoi slockhoIdois. If aII slockhoIdois lhink lhis vay, hovovoi, nono of
    lhon viII invosl in noniloiing and IillIo oi no infoinalion aloul nanagononl and fiin
    aclivilios viII lo pioducod. Loss infoinalion foi slockhoIdois noans lho noiaI hazaid
    piolIon viII lo aggiavalod.

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