Volume : 2, Issue : 11, November - 2013

Global Financial crisis 2008: Role of Asymmetric Information

Ms. Pragya Madan , Ms. Jasdeep Kaur

Abstract :

Financial markets, transaction costs and financial intermediation are essential to the well–functioning of financial sector of an economy. They perform the role of channeling funds to parties that have profitable investment opportunities. However, asymmetric information can seriously impair this process when parties entering the financial contract are not fully aware of the risks involved .They are thus exposed to incomplete information sets that limit their coverage from possible losses. This severely hampers money supply and aggregate economic activity finally rendering the situation of financial crisis. This article addresses the problem of information asymmetry as a cause behind the contemporary economic crisis. The article emphasizes that the phenomenon of information asymmetry as explained by Adverse selection and Moral hazard is one of the most important concepts in explaining the existence of the current crisis, by analyzing financial structure of U.S. economy and other emerging market countries.