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Ignorant Experts and Financial Fragility

Asano, Koji (2021): Ignorant Experts and Financial Fragility.

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We examine expertise acquisition incentives in a model of debt funding markets in which expertise reduces the cost of acquiring information about underlying collateral. Lenders acquiring expertise gain advantages in financial contracts with borrowers and extract rents from them by creating fear of information production that gives rise to illiquidity. As information about collateral decays over time, there is growth in credit and expertise acquisition, making the economy more vulnerable to an aggregate shock. This result suggests that the growth in the financial sector is associated with the prevalence of opaque assets and a subsequent crisis.

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