Competition and Transparency in Financial Markets

Abstract

Is competition sufficient to induce transparency in financialmarkets or is regulation necessary to achieve this? We examine this question taking into consideration that competition in financial markets frequently resembles a tournament, where superior relative performance and greater visibility are rewarded with convex payoffs. We show under fairly general conditions (i.e., model variations) that higher competition for this renumeration often makes discretionary disclosure less likely. In the limit when the market is perfectly competitive, transparency is minimized. This analysis implies that competition might be unreliable as a driver of transparency and self-regulation in financial markets, especially in settings where tournament-style renumeration takes place.