The Social Value of Financial Expertise
American Economic Review · 2019 · Volume 109 · Issue 2
Abstract
I study expertise acquisition in a model of trading under asymmetric information. I propose and implement a method to measure r, the ratio of the marginal social value to the marginal private value of expertise. This can be decomposed into three sufficient statistics: traders' average profits, the fraction of bad assets among traded assets, and the elasticity of good assets traded with respect to capital inflows. I measure r = 0.16 for the junk bond underwriting market. Since this is less than 1, it implies that marginal investments in expertise destroy surplus.
Keywords
Asymmetric and Private Information, Mechanism Design, Portfolio Choice, Investment Decisions, Information and Market Efficiency, Event Studies, Insider Trading, Banks, Depository Institutions, Micro Finance Institutions, Mortgages, Personal, Professional, and Business Services
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