The economics of money, banking, and financial markets

PART 3

 

Financial Institutions  163

CHAPTER 8

An Economic Analysis of Financial Structure 

164

Basic Facts About Financial Structure Throughout the World ........................................164

Transaction Costs.........................................................................................................................167

How Transaction Costs Influence Financial Structure ......................................................... 167

How Financial Intermediaries Reduce Transaction Costs .................................................... 168

Asymmetric Information: Adverse Selection and Moral Hazard ...................................169

The Lemons Problem: How Adverse Selection Influences Financial Structure .........169

Lemons in the Stock and Bond Markets .............................................................................. 170

Tools to Help Solve Adverse Selection Problems ................................................................. 170

FYI  The Enron Implosion  172

How Moral Hazard Affects the Choice Between Debt and Equity Contracts ............175

Moral Hazard in Equity Contracts: The Principal–Agent Problem ....................................... 175

Tools to Help Solve the Principal–Agent Problem ............................................................... 176

How Moral Hazard Influences Financial Structure in Debt Markets ............................178

Tools to Help Solve Moral Hazard in Debt Contracts .......................................................... 178

Summary ............................................................................................................................ 180

APPLICATION

  Financial Development and Economic Growth ...............................181

FYI  The Tyranny of Collateral  182

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Contents in Detail 

xvii

APPLICATION

  Is China a Counterexample to the Importance  

of Financial Development? ...............................................................................183

Summary 184  •  Key Terms 185  •  Questions 185  •  Applied Problems 186  •   

Data Analysis Problems  187   •   Web Exercises  187   •   Web References  187