Competition and Transparency in Financial Markets
46 Pages Posted: 6 Mar 2011
Date Written: December 28, 2010
Is competition sufficient to induce transparency in financial markets? We examine this question taking into consideration that competition in financial markets frequently resembles a tournament, where superior relative performance and greater visibility are rewarded with convex payoffs. We show under fairly general conditions (i.e., model variations) that higher competition for this remuneration often makes discretionary disclosure less likely. In the limit when the market is perfectly competitive, transparency is minimized. We show that this effect may decrease efficiency and per capita welfare, particularly when it is optimal to screen all market participants to determine whether they should be allocated a scarce good. Our analysis implies, then, that competition might be unreliable as a driver of transparency and efficiency in financial markets, especially in settings where tournament-style remuneration takes place.
Keywords: Transparency, Disclosure, Financial Markets
JEL Classification: G18
Suggested Citation: Suggested Citation