Discussion: Sorting Equilibria in Financial Markets: The Incentive Problem

Abstract

The use of third-party quality certification, or sorting, to overcome asymmetrically informed markets was examined recently by Viscusi (Bell Journal, Spring 1978, pp.277–279) in a labor market context. Campbell and Kracaw (CK) have extended the Viscusi equilibrium and applied it to the potentially more interesting financial markets context. CK examine the incentives for low-quality firms to offer side-payments (a financial economists' term for bribes) to information producers, or sorters, to prevent resolution of the information asymmetry. Introducing bribes formally into the analysis maylead to a better understanding of some financial institutions; an earlier CK paper is such an examination (Journal of Finance, September 1980, pp. 863–882). Perhaps, in other applications of the sorting model, other previously unjustifiable financial activities and their associated payments might be seen as side-payments for some sorting activity.