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19 July, 00:37

Why are financial intermediaries willing to engage in information collection activities when investors in financial instruments may be unwilling to do so?

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  1. 19 July, 01:00
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    Investors in financial instruments who engage in information collection face a free-rider problem, which means other investors may be able to benefit from their information without paying for it. Individual investors, therefore, have inadequate incentives to devote resources to gather information about borrowers who issue securities. Financial intermediaries avoid the free-rider problem because they make private loans to borrowers rather than buy the securities borrowers have issued. Because they will reap all the benefits from the information they collect, their information collection activities will be more profitable. They, thus, have greater incentive to invest in information collection.
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