ch 7

1) What are economies of scale in financial transactions? How can financial intermediaries achieve these economies?

2) Explain how the "lemons" problem could cause financial markets to fail.

3) Distinguish between adverse selection and moral hazard.

4) What facts about financial structure can be explained by adverse selection?

5) What facts about financial structure can be explained by moral hazard?

6) What factors usually cause an increase in moral hazard and adverse selection?

7) What is the principal-agent problem?

8) What is the free-rider problem? Describe some situations that this problem creates.

9) The U.S. has more lawyers per capita than any other country in the world. It is also among the richest countries in the world. Explain why these two facts may not be mere coincidence.

10) Why should we be concerned about conflicts of interest in the financial services industry?

11) What conflicts of interest can arise in investment banking?

12) What conflicts of interest can arise in accounting firms?

13) What conflicts of interest can arise in credit-rating agencies?

14) Evaluate the major provisions of Sarbanes-Oxley and the Global Legal Settlement as remedies for conflict of interest problems.

15) What issues do critics cite when discussing why Sarbanes-Oxley has led to a decline in U.S. capital markets?