Cream skimming in financial markets
By: Patrick Bolton, Tano Santos, Jose A. Scheinkman
Contributors: Santos, Tano; Scheinkman, José Alexandre; National Bureau of Economic Research
Series: NBER working paper series -- working paper 16804; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16804.
Publisher: National Bureau of Economic Research
Published: 2011
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "We propose an equilibrium occupational choice model, where agents can choose to work in the real sector (become entrepreneurs) or to become informed dealers in financial markets.  Agents incur costs to become informed dealers and develop skills for valuing assets up for trade.  The financial sector comprises a transparent competitive exchange, where uninformed agents trade and an opaque over-the-counter (OTC) market, where informed dealers offer attractive terms for the most valuable assets entrepreneurs put up for sale.  Thanks to their information advantage and valuation skills, dealers are able to provide incentives to entrepreneurs to originate good assets.  However, the opaqueness of the OTC market allows dealers to extract informational rents from entrepreneurs.  Trade in the OTC market imposes a negative externality on the organized exchange, where only the less valuable assets end up for trade.  We show that in equilibrium the dealers' informational rents in the OTC market are too large and attract too much talent to the financial industry"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 5/17/2011.

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