Cream Skimming in Financial Markets

Abstract

[evdate 2012-12-18] IAS Quantitative Finance Seminar Series. Co-organized by Department of Economics and Department of Finance.

Abstract: The speaker, together with Prof Patrick Bolton and Prof Tano Santos from Columbia University, propose a model where agents choose to become entrepreneurs or informed dealers in financial markets. Agents incur costs to become dealers and develop skills for valuing assets. The financial sector comprises a transparent exchange, where uninformed agents trade, and an opaque over-the-counter (OTC) market, where dealers offer attractive terms for the best assets. Dealers provide incentives for entrepreneurs to originate good assets, but the opaqueness of the OTC market allows dealers to extract rents. By siphoning out good assets, the OTC market lowers the quality of assets in the exchange. In equilibrium, dealers’ rents are excessive and attract too much talent to Finance.

Prof José Scheinkman received his PhD in Economics from University of Rochester in 1974. He was Alvin H. Baum Distinguished Service Professor and Chairman of the Department of Economics at the University of Chicago, Blaise Pascal Research Professor and Vice-President in Financial Strategies at Goldman, Sachs & Co. He is a founding partner of Axiom Investment Advisors, LLC and a member of the Board of Directors of Cosan Limited. He is currently Theodore A. Wells ‘29 Professor of Economics at Princeton University.

Prof Scheinkman’s research focuses on building models that shed light on a variety of economic phenomena such as economic fluctuations, the nature of oligopolistic competition, the growth of cities, informal economic activity, the spatial distribution of crime, the dynamics of asset prices and bubbles in financial markets.

Prof Scheinkman is a Member of the US National Academy of Sciences, a Fellow of the American Academy of Arts and Sciences, the Econometric Society, the John Simon Guggenheim Memorial Foundation, and a “docteur honoris causa” from Université Paris-Dauphine.

Duration: 81 min.