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Chapter 8: Q.17 (page 236)

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

Short Answer

Expert verified

Adverse selection and moral hazards are caused by the asymmetric information problem.

Step by step solution

01

Content Introduction

Asymmetric information refers to information that is not the same, therefore inconsistency occurs when there is a difference in the information offered to people that is not the actual information.

02

Content Explanation

Asymmetric information prevents a market from working efficiently or in some situations from working at all. In such situations, it becomes necessary for the government to intervene to help in efficient working of the market.

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Most popular questions from this chapter

In December 2001, Argentina announced it would not honor its sovereign (government-issued) debt. Many investors were left holding Argentinean bonds priced at a fraction of their previous value. A few years later, Argentina announced it would pay back 25% of the face value of its debt. Comment on the effects of information asymmetries on government bond markets. Do you think investors are currently willing to buy bonds issued by the government of Argentina?

What steps can the government take to reduce asymmetric information problems and help the financial system function more smoothly and efficiently?

In this chapter, we discuss the lemons problem and its effect on the efficient functioning of a market. This theory was initially developed by George Akerlof. Go to http://www .nobel.se/economics/laureates/2001/public.html. This site reports that Akerlof, Spence, and Stiglitz were awarded the Nobel Prize in economics in2001 for their work. Read this report down through the section on George Akerlof. Summarize his research ideas in one page

For each of the following countries, identify the single most important (largest) and least important (smallest) source of external funding: United States; Germany; Japan; Canada. Comment on the similarities and differences among the countries鈥� funding sources.

Suppose you have data about two groups of countries, one with efficient legal systems and the other with slow, costly, and inefficient legal systems. Which group of countries would you expect to exhibit higher living standards?
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