Economic Analysis of Financial Structure

This set of flashcards covers key concepts from the Economic Analysis of Financial Structure, focusing on financial structure, information problems, and their implications for banking and markets.

Financial Structure

The system of financial relationships and institutions that facilitate the flow of funds from savers to borrowers.

Asymmetric Information

A situation in which one party has more or better information than the other, leading to potential market failures.

Adverse Selection

A market failure that occurs when buyers and sellers have different amounts of information, typically leading to the selection of high-risk borrowers.

Moral Hazard

The risk that a party to a transaction has an incentive to act differently because they do not bear the full consequences of their actions.

Covenants

Conditions included in debt contracts that impose certain restrictions on borrowers to mitigate moral hazard.

Transaction Costs

Expenses incurred while making an economic exchange, which can shape financial structure by influencing who can raise funds.

Collaterals

Assets pledged by a borrower to secure a loan, which can reduce the lender's risk.

Marketable Securities

Financial instruments that are intended to be traded, but are not the primary financing method for firms.

Heavy Regulation

The strict oversight of financial institutions and markets aimed at maintaining stability and protecting investors.

Information Problems

Challenges arising from the lack of transparency in financial transactions, which can affect lending and investment decisions.