Chapter 15

Chapter 15 - Chapter 15-Conflicts of Interest in the...

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Chapter 15-Conflicts of Interest in the Financial Industry Conflicts of Interest •Type of moral hazard problem that occurs when a person or institution has multiple objectives and as a result has conflicts between them •Might be responsible for –Previous scandals (Enron) –Subprime financial crisis of 2007-2008 Why are conflicts of interest important? •Economies of scale realized from cost advantages in the collection and use of information •Economies of scope realized by providing multiple financial services to customers •Focus on conflicts of interest that arise when financial service firms or their employees serve one interest at the expense of another’s, which could be their own interest, rather than their customer’s, or a firm’s interest who wants to sell securities rather than investors’ who are purchasers of the securities. As a result they might misuse information, provide false information, or conceal information. Why Do We Care? •Conflicts of interest can substantially reduce the quality of information in financial markets increasing asymmetric information problems •Asymmetric information prevents financial markets from channeling funds into productive investment opportunities and causes financial markets and economies to be less efficient
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This note was uploaded on 02/13/2011 for the course ECON 121 taught by Professor Labadie during the Spring '10 term at GWU.

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Chapter 15 - Chapter 15-Conflicts of Interest in the...

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