Chapter 8: Q.11 (page 235)
How can asymmetric information problems lead to a bank panic?
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Which relationship would you expect to exist between measures of corruption and living standards at the country level? Explain by which channel corruption might affect living standards.
Go to the St. Louis Federal Reserve FRED database and find data on net worth of households (TNWBSHNO) and the net percentage of domestic banks tightening standards for auto loans (STDSAUTO). Adjust the units setting for the net worth indicator to “Percent Change from Year Ago,” and download the data into a spreadsheet.
a. Calculate the average, over the most recent four quarters and the four quarters prior to that, for the bank standards indicator and the “percent change in net worth” indicator. Do these averages behave as you would expect?
b. Use the Data Analysis tool in Excel to calculate the correlation coefficient for the two data series from 2011:Q2 to the most recent quarter of data available. What can you conclude about the relationship between the net worth of households and bank auto lending standards? Is this result consistent with efforts to reduce asymmetric information?
Why are financial intermediaries willing to engage in information collection activities when investors in financial instruments may be unwilling to do so?
In this chapter, we discuss the lemons problem and its effect on the efficient functioning of a market. This theory was initially developed by George Akerlof. Go to http://www .nobel.se/economics/laureates//public.html. This site reports that Akerlof, Spence, and Stiglitz were awarded the Nobel Prize in economics in for their work. Read this report down through the section on George Akerlof. Summarize his research ideas in one page
Suppose that in a given bond market, there is currently no information that can help potential bond buyers to distinguish between bonds. Which bond issuers have an incentive to disclose information about their companies? Explain why.
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