The cost of gathering information about unfamiliar securities may lead to gains from standardization; firms issue a particular security because it is used by other firms. To support standardization as an equilibrium phenomenon, information must be non-transferable (otherwise it might be revealed by prices or the observation of other agents’ decisions) and it must be generic (useful in evaluating a number of securities). A competitive equilibrium in which standard contracts are used may be subject to coordination failure: while there always exists a constrained efficient equilibrium, there may also exist Pareto-ranked equilibria.
ASJC Scopus subject areas
- Economics and Econometrics