Introduction: Asymmetric Information in Financial Markets

Abstract

Financial economies are known as a special branch of economics, since financial products are different from other goods and services. This book analyses these financial products based on information theory and presents why financial markets and institutions are prone to failure. Thus, regulation can minimize the risk of failure and those chapter discusses how legal and regulatory constraints affect the corporate and financial structures of a country. This chapter provides an introduction to financial market problems and establishes the basic framework for the analysis for the succeeding chapters. It starts with a discussion of a standard model of an economy – no asymmetric information, imperfect competition, or any other imperfection. The ideal economy is made as a standard for defining and analyzing financial market failure. The chapter also discusses complications that can arise under asymmetric information. Finally, it gives a summary of the remaining chapters and the assumptions on which they are based.