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M. Rothschild, J. Stiglitz (1976)
17 – EQUILIBRIUM IN COMPETITIVE INSURANCE MARKETS: AN ESSAY ON THE ECONOMICS OF IMPERFECT INFORMATION*
M. Spence (1973)
Job Market SignalingQuarterly Journal of Economics, 87
George Akerlof (1970)
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Merton Miller (1958)
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S. Ross (1978)
Some Notes on Financial Incentive-Signalling Models, Activity Choice and Risk PreferencesJournal of Finance, 33
Myron Scholes, G. Benston, Clifford Smith (1976)
A Transactions Cost Approach to the Theory of Financial IntermediationJournal of Finance, 31
Riley Riley (1975)
“Competitive Signalling,”Journal of Economic Theory, 10
M. Spence (1974)
Competitive and optimal responses to signals: An analysis of efficiency and distributionJournal of Economic Theory, 7
J. Stiglitz (1975)
Information and economic analysis
Michael Jensen, W. Meckling (1976)
Theory of the Firm
I ntroduction and S ummary N umerous markets are characterized by informational differences between buyers and sellers. In financial markets, informational asymmetries are particularly pronounced. Borrowers typically know their collateral, industriousness, and moral rectitude better than do lenders; entrepreneurs possess “inside” information about their own projects for which they seek financing. Lenders would benefit from knowing the true characteristics of borrowers. But moral hazard hampers the direct transfer of information between market participants. Borrowers cannot be expected to be entirely straightforward about their characteristics, nor entrepreneurs about their projects, since there may be substantial rewards for exaggerating positive qualities. And verification of true characteristics by outside parties may be costly or impossible. Without information transfer, markets may perform poorly. Consider the financing of projects whose quality is highly variable. While entrepreneurs know the quality of their own projects, lenders cannot distinguish among them. Market value, therefore, must reflect average project quality. If the market were to place an average value greater than average cost on projects, the potential supply of low quality projects may be very large, since entrepreneurs could foist these upon an uninformed market (retaining little or no equity) and make a sure profit. But this
The Journal of Finance – Wiley
Published: May 1, 1977
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