Understanding financial crisis using information asymmetry framework

There are n (n as in many) number of papers on the subprime crisis .

Whichever way you look at it, the root cause lies in information asymmetry. By information asymmetry, I mean adverse selection, moral hazard and free riding. Mishkin has written a wonderful paper explaining each of these and how worsening info asymmetry leads to financial crisis. 

What distinguishes financial markets from general markets is that degree of info asymmetry is much more in former. And moreover, in a product/service market, once you get delivery of the product/service (which is usually immediate or after a few days), and in fin market your returns only come over a period of time. Hence, information problems continue and you are worried all the time about your investment/ loan.

I have expanded this analysis and have tried to understand the subprime crisis using the same. My paper can be found here.

Comments/Suggestions are welcome.

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One Response to “Understanding financial crisis using information asymmetry framework”

  1. Mishkin explains the Fed Policy and rate cuts « Mostly Economics Says:

    […] of financial instability is worsening of information asymmetry in financial markets (explained here). This leads to two kinds of risk: The first is what I will refer to as valuation risk:  The […]

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