A friend who is taking her first class in investments asks you why the regulatory bodies place so much emphasis on minimizing insider information if many of the potential problems associated with financial transactions stem from information asymmetry or a lack of information. How would you respond?
What will be an ideal response?
While it is true that more information is almost always preferred to less, insider information is really a form of information asymmetry. In this case individuals privy to information not available to the public have a strong incentive to use that information and act opportunistically,in this case profiting from the information basically because others involved in the transaction do not share the same information. If this practice were not illegal and was seen as acceptable, in the long run trading in most financial assets (such as stocks and bonds) would probably cease. The majority of investors, being outsiders, would always feel that they were at a disadvantage to the insiders, and as a result of the increased risk would likely not invest in these assets. In order to assure the viability of the secondary financial markets insider information is prohibited, this reduces the likelihood of opportunistic behavior from information asymmetry.
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Which of the following has no market “price”?
A. Labor B. Capital C. Entrepreneurship D. Fixed factors
The name of the currency now being used throughout the European Monetary Union is the __________.
Fill in the blank(s) with the appropriate word(s).