Would Greater Transparency Increase or Decrease Contracting Costs?

JOURNAL OF FINANCIAL ENGINEERING, Vol 4 No 2, June 1995

Posted: 25 Aug 1998

See all articles by Michael F. Ferguson

Michael F. Ferguson

University of Cincinnati - Department of Finance - Real Estate

Corinne M. Bronfman

University of Arizona

Abstract

This article focuses on the regulatory goal of increasing the transparency of the OTC derivatives market. We show that users of these instruments employ the services of an intermediary in order to minimize the total cost of establishing a hedge position. Financial intermediation involves almost exclusively the production of various kinds of information which gives the intermediaries a comparative advantage in the development of financial products. Would increased transparency lower contracting costs? We conclude not. The decision to use an intermediary remains optimal even in the presence of informational asymmetries when compared with the alternative of contracting directly with a counterparty. In other words, the comparative advantage of the intermediary in the production of the various types of information that go in these contracts more than offsets the expected costs and risks that informational asymmetries impose on the counterparties.

JEL Classification: G13

Suggested Citation

Ferguson, Michael F. and Bronfman, Corinne M., Would Greater Transparency Increase or Decrease Contracting Costs?. JOURNAL OF FINANCIAL ENGINEERING, Vol 4 No 2, June 1995. Available at SSRN: https://ssrn.com/abstract=6669

Michael F. Ferguson

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States
513-556-7080 (Phone)

Corinne M. Bronfman (Contact Author)

University of Arizona ( email )

Department of History
Tucson, AZ 85721
United States

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