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The Social Value of Financial Expertise

  • Pablo Kurlat
American Economic Review
vol. 109, no. 2, February 2019
(pp. 556-90)
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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.

Citation

Kurlat, Pablo. 2019. "The Social Value of Financial Expertise." American Economic Review, 109 (2): 556-90. DOI: 10.1257/aer.20171735

Additional Materials

JEL Classification

  • D82 Asymmetric and Private Information; Mechanism Design
  • G11 Portfolio Choice; Investment Decisions
  • G14 Information and Market Efficiency; Event Studies; Insider Trading
  • G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
  • L84 Personal, Professional, and Business Services