Unformatted text preview: . In a sense, small savers
have appointed the FI as a delegated monitor to act on their behalf.2 Not only does the
FI have a greater incentive to collect information, the average cost of collecting information is lower. For example, the cost to a small investor of buying a $100 broker’s report may seem inordinately high for a $10,000 investment. For an FI with $10 million
under management, however, the cost seems trivial. Such economies of scale of information production and collection tend to enhance the advantages to savers of using FIs
rather than directly investing themselves.
Second, associated with the greater incentive to monitor and the costs involved in
failing to monitor appropriately, FIs may develop new secondary securities that enable
them to monitor more effectively. Thus, a richer menu of contracts may improve the
monitoring abilities of FIs. Perhaps the classic example of this is the bank loan. Bank
loans are generally shorter-term debt contracts than bond contracts. This short-term nature allows the FI to exercise more monitoring power and control over the borro...
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This document was uploaded on 03/09/2014 for the course ACC 301 at HELP University.
- Spring '09