Secret Keeping Intermediaries

Guillermo Ordonez, Gary Gorton and Tri Vi Dang
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Gary Gorton: Yale School of Management
Tri Vi Dang: University of Mannheim

No 402, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: Information is critical to reallocate funds efficiently. However, this same information may also hinder liquidity by raising the concerns of adverse selection. When lending and liquidity provision are separated activities, individuals that produce information to lend do not internalize its negative externality on the liquidity properties of those loans. Financial intermediaries can eliminate this effect by hiding the information. If this is not possible, still intermediaries can internalize the negative effects of information by weighting in the benefits of liquidity.

Date: 2012
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