Irrational Economist_ Making Decisions in a Dangerous World - Erwann Michel-Kerjan [97]
The more standard problems raised by asymmetric information are also relevant here. A contingent market can exist only if the contingency can be verified by all parties, and this condition will frequently not hold. This is probably the most basic reason why the full set of markets called for in the theory of general equilibrium under uncertainty does not exist.
INFORMATION AS A COMMODITY
The last set of remarks has put increasing importance on the role of information in modulating the organization of the economy and, in particular, the types of securities (contingent contracts) that are possible and the terms on which they are exchanged. Now the distribution of information cannot simply be taken as given. On the contrary, information can be acquired but it usually comes at some cost. For example, the physician acquires information by attending medical school, by his subsequent residencies, and from his own practice. He or she illustrates the special properties of information as a commodity. The same information is used over and over again; unlike other inputs, it is not consumed by being used. This property implies that it is efficient to specialize. It does not pay that everyone in a society acquires this information, but only a number needed to supply the necessary services.
Bankers have traditionally supplied this function in the financial world. Here, the basic information is training and experience, permitting the evaluation of specific information about potential borrowers. However, the relation ceases to be easily described by a market, because each extension of credit not only involves knowledge about specific borrowers but also requires money.
There is therefore a tendency toward small numbers of suppliers—that is, toward the absence of “perfectly competitive” markets (in which there is such a large number of buyers and sellers that none of them alone can influence the price at the equilibrium). Consequently, there is a set of assets whose trad-ability is limited, and so is of limited liquidity. This in turn means that holding money begins to have a value, since other assets are not easily used to purchase other goods.
The advantages of marketization remain real, so that there are recurrent attempts to revive it, as with mortgage-backed securities. But the additional complications mean that there is a degradation of information. For example, the bank initially extending a mortgage has information that will not be transmitted to buyers of mortgage-based securities. Further, the fact that the initial mortgagee is planning to resell the mortgage means that it has less incentive to gather information and to monitor the mortgagor. The same principle applies to any securitization that increases the number of steps between the original source of the risk and the ultimate risk-bearer. These remarks point to some of the tensions marking financial markets recurrently in the history of capitalism.
INEFFICIENT INCENTIVES: AN ENDEMIC PROPERTY OF CAPITALISM?
In a discussion of the current financial crisis, Alan Greenspan, who was chairman of the Federal Reserve of the United States from 1987 to 2006, raised a very pertinent question: Why did the financial concerns make such risky loans? They had obvious incentives not to put themselves at risk; they would be the losers, as indeed turned out to be the case. Also, they