Carnegie Mellon University

Video: Do Consumers Benefit From More Competition in Financial Markets?

Ariel Zetlin Jones, Tepper School Associate Professor of Economics, speaks about his research on what makes financial markets work.

Video Transcript

I'm a macroeconomist with interest in financial markets, so most of my research is aimed at developing a better understanding of what makes financial markets work. And, importantly, how do we design the optimal regulations of financial markets and financial institutions.

My paper, "Screening and Adverse Selection in Frictional Markets," focuses on the economics of information in competition and financial markets. In the wake of the financial crisis, there are a lot of policies intended to promote competition and/or transparency in financial markets. Basically, trying to make financial markets behave more competitive and make it easy for investors to know and understand prices in financial markets. And so, our question was are these necessarily good policies. So, we're thinking about markets for loans or credit, markets for insurance like healthcare, or even markets for just selling or transacting in financial securities. So, we think of these markets as being special because they're information friction. So, we usually think some agents know more information than others. So, in insurance, we might think of consumers knowing more about their healthcare risks than insurers. In the market for used cars, we might think of sellers of cars knowing more about the quality of their car than the potential buyer. And, when we think about these markets which have been studied for a long time, we might ask, should we promote more competition in these types of markets. Is this necessarily a good thing?

What we want to do is adapt and develop these models, be able to study imperfect competition at the same time. And, that had not been done. And so, we made some kind of novel, analytical insights that allow us to study a market with informational frictions and frictions to competition at the same time and understand how these markets work. And so, really, the contribution of our paper is developing a unified framework that can study the interplay between informational frictions and frictions to competition. So, among other findings, kind of the most important one we find is that in markets with informational frictions, increasing competition is not necessarily a good thing. The challenging part about understanding this result is that increasing competition impacts the way that purchasers of these securities might try to screen people with different quality assets. And, what we show is that increasing competition can actually lead to more screening. And, this additional screening that comes with more competition can be harmful for people trying to sell their securities and acquire liquidity.

The bottom line is that, you know, in markets where there's lots and lots of market power, increasing competition can improve outcomes for all possible traders in this environment. But, when we already have some degree of market power, policies that spur additional competition can be harmful for not just the people who are trying to acquire the assets but even the people trying to sell the assets.