Competition and Transparency in Financial Markets

46 Pages Posted: 6 Mar 2011

See all articles by Bruce I. Carlin

Bruce I. Carlin

University of California, Los Angeles (UCLA) - Anderson School of Management

Shaun Davies

University of Colorado at Boulder - Leeds School of Business

Andrew Iannaccone

University of California, Los Angeles (UCLA)

Date Written: December 28, 2010

Abstract

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

Carlin, Bruce I. and Davies, Shaun and Iannaccone, Andrew, Competition and Transparency in Financial Markets (December 28, 2010). AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1778262 or http://dx.doi.org/10.2139/ssrn.1778262

Bruce I. Carlin (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Shaun Davies

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

Andrew Iannaccone

University of California, Los Angeles (UCLA) ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States

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