1. Figure 1 in Chapter 8 broke down the sources of external financing for non-financial businesses in the U.S. as follows:

Non-bank loans 38%

Bank loans 18%

Bonds 32%

Stocks 11%

Explain why the young founders of Google, Amazon, Facebook, Uber, Airbnb, Netflix turned to venture capital (a non-bank financial intermediary) before they turned to banks for loans or do an IPO to become a public corporation so they can access financing from the bond and stock markets. What does the textbook say about how venture capital firms deal with the free-rider problem? the moral hazard problem?

Use the concepts of adverse selection (lemons problem) and moral hazard (principal-agent problem) faced by banks and stock market investors and explanations for facts # 1, 2, 5, 6, 7, and 8 (refer to PPT slides and/or textbook).

8 An Economic Analysis of Financial Structure ning Objectives Preview ntify eight basic s about the global ncial system. marize how healthy and vibrant economy requires a financial system that m people who save to people who have productive investment opp how does the financial system make sure that your har opportunities. But get d-earned savings action costs affect channeled to Paula the Productive Investor rather than to Benny th cial intermediaries. This chapter answers that question by providing an economic ana analysis of how our financial structure is designed to promote economic efficiency. The analysis ibe why a few simple but powerful economic concepts that enable us to exp features of our netric information to adverse on and moral why finan borr inancial system, such as why financial contracts are written as they are an intermediaries are more important than securities markets for getting tu ers. The analysis also demonstrates the important link between the financial y ize adverse n and summarize s in which it can ce the performance of the aggregate economy, which is the subject of Part 6 o BASIC FACTS ABOUT FINANCIAL STRUCTURE THROUGHOUT THE WORLD The financial system is complex in structure and function throughout the world. It -agent arising from and summarize ds for ncludes many different types of institutions: banks, insurance companies, mutua i funds, stock and bond markets, and so on-all of which are regulated by government The financial system channels trillions of dollars per year from savers to people with productive investment opportunities. If we take a close look at financial structure all over the world, we find eight basic facts, some of which are quite surprising, that we must explain if we are to understand how the financial system works sed to ral hazard tracts. The bar chart in Figure 1 shows how American businesses financed their activities using external funds (those obtained from outside the business itself) in the period 1970-2000 and compares U.S, data with data for Germany.Japan, and Canada. The conclusions drawn from this period still hold true today. The Bank Loans category is made up primarily of loans from depository institutions; Nonbank Loans are primarily loans by other financial diaries; the Bo commercial paper, and Stock consists of new issues of equity (stock market sha nds category includes marketable debt securities, such as corporate bonds and res) Now let's explore the eight facts 1. Stocks are not the most important source of external financing for businesses Because so much attention in the media is focused on the stock market, many p