Short Answer 5 The spread of information and the transportation revolution EXCES

Question

Short Answer 5 The spread of information and the transportation revolution EXCESS ENTRY DiscOUNT Number Mean Excess of New Standard Period Entry Discount Banks Deviation Minimum Maximum -Statistic A. All Banks 1839-58 0258 1.673 110 286 1.290 9.56 B. By Period 1839-45 1846-50 1851-58 0697 0220 412 17 059 290 8.26 2.94 3.96 203 021 -.286 107 797 737 0080 1,058 068 The above table shows the mean discount rates on new state bank notes (c.g Mean Excess Entry Discount") from 1839 to 1858. Assume you are a merchant and a customer is trying to purchase goods from your store using a bank note from an out of state bank. Use the intuition of asymmetric information to explain why you will only provide the customer a *

Explanation / Answer

Asymmetric information is basically an assumption where one of party has more or better information than the other.

In the case above we need to define the concept of a bad or good bank. A good institution is the one whose note price eventually converges to the modal price, and a bad bank has a note that diverges from the modal discount. If we assume that we have a bad bank, then the seller has less confidence in the bank note’s value, because he knows more too little about Bank’s safety state; this scenario means that there is imperfect information to negotiate any deal in this market, and the buyer and the merchant are affected in his options when they want to make any deal.

Therefore, a bank note from a bad bank is less secure to trade with, and that’s why the store owner gives less value to these bills because the lack of information makes him less willing to trust his economic benefit to a bad note.

The information is the key in this game.

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