Optimal Opacity on Financial Markets

Caspar Siegert

Discussion Papers in Economics from University of Munich, Department of Economics

Abstract: We analyze the incentives for information disclosure in financial markets. We show that borrowers may have incentives to voluntarily withhold information and that doing so is most attractive for claims that are inherently hard to value, such as portfolios of subprime mortgages. Interestingly, opacity may be optimal even though it increases informational asymmetries between contracting parties. Finally, in our setting a government can intervene in ways that ensure the liquidity of financial markets and that resemble the initial plans for TARP. Even if such interventions are ex-post optimal, they affect incentives for information disclosure and have ambiguous ex-ante effects.

Keywords: Information Acquisition; Adverse Selection; Allocative Efficiency; Opacity (search for similar items in EconPapers)
JEL-codes: D82 G21 G32 (search for similar items in EconPapers)
Date: 2014-04-01
New Economics Papers: this item is included in nep-cba, nep-cta and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenec:20937

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