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Help with an Finance essay, I suck at formatting.
American_King
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Registered User new member
Basically as the title says, I'm doing an essay at uni, this is the first one that counts towards my actually grade, and I'm worried that it might not be good.
I've done the first question so far. I would really appreciate someone who is good at essays giving me some feedback. I still have a couple of weeks before the deadline, so if I need to re-write stuff I still have time.
I think I need to find some more good references, and appendix 1 is going to be this
From a journal entry I found.
Thanks in advance!
I've done the first question so far. I would really appreciate someone who is good at essays giving me some feedback. I still have a couple of weeks before the deadline, so if I need to re-write stuff I still have time.
A) Discuss the problems likely to be faced by an economy in the absence of financial intermediation.
Financial intermediation is the process by which third parties act as a broker between individuals or organisations wanting to borrow or lend money, such as Banks, Building societies and Insurance Companies. Lenders get paid an agreed rate of interest by the financial intermediary, and borrows will pay and agreed rate of interest to the financial intermediary.
In a theoretical economy without financial intermediation, there would be some significant problems -
Lenders want to sacrifice cash flow for interest earnings, and borrowers want to receive cash flow in return for making interest payments. Without any intermediaries to facilitate transactions, both lenders and borrowers would be restricted to borrowing and lending from parties which have mutual goals for the amount they are sharing. This is massively inefficient, and would result in reduced economic activity, and a significant number of parties would be unable to find an appropriate lender or borrower for their needs. Cash would go idly underutilised, and potential borrowers would be unable to find the investment they need. This would particularly impact small investors, like private individuals, and small borrowers like new start up businesses.
Financial intermediaries can offer a range of flexible and inflexible durations for financial agreements. Without financial intermediaries, when a lender or borrower wanted to end the finance agreement, their counterpart would be forced to end it also. If a lender would prefer to carry on the agreement for a while, but the borrower is ready to end it, then one party will have to compromise. This means that capital will not be used to it's maximum efficiency across the entire economy.
In any economy, peoples and firms attitude towards risk has a large impact on their spending habits, if they feel to have little financial protection, they will be less likely to make large scale investments, like a new factory or a new house. The buyer and the lender may have differing attitudes towards risk, and financial intermediaries can interface these attitudes, with appropriate protections and insurance, effectively calculating risk premiums, and a broad range of options for lenders and borrowers, such as fixed rate or variable mortgages.
Traditionally, two of the key roles of financial intermediaries have been to reduce transaction costs, and to reduce the impact of Asymmetric information. Transaction costs are the costs incurred by arranging and implementing any given financial agreement, and asymmetric information occurs when one party has greater access to information than another party. However, in the past decade or so this is becoming less and less the case. “these factors may once have been central to the role of intermediaries, they are increasingly less relevant†Scholtens and Van Wensveen (2000). So in a theoretical economy without financial intermediation, it is perfectly plausible that alternative solutions could be found to these issues, such as perhaps “signalling and screening†Akerlof, Spence and Stiglitz (2001) for Asymmetric information problems, and there are various ways in which investment in ICT can reduce ICT costs (see Appendix 1)
Financial intermediation is the process by which third parties act as a broker between individuals or organisations wanting to borrow or lend money, such as Banks, Building societies and Insurance Companies. Lenders get paid an agreed rate of interest by the financial intermediary, and borrows will pay and agreed rate of interest to the financial intermediary.
In a theoretical economy without financial intermediation, there would be some significant problems -
Lenders want to sacrifice cash flow for interest earnings, and borrowers want to receive cash flow in return for making interest payments. Without any intermediaries to facilitate transactions, both lenders and borrowers would be restricted to borrowing and lending from parties which have mutual goals for the amount they are sharing. This is massively inefficient, and would result in reduced economic activity, and a significant number of parties would be unable to find an appropriate lender or borrower for their needs. Cash would go idly underutilised, and potential borrowers would be unable to find the investment they need. This would particularly impact small investors, like private individuals, and small borrowers like new start up businesses.
Financial intermediaries can offer a range of flexible and inflexible durations for financial agreements. Without financial intermediaries, when a lender or borrower wanted to end the finance agreement, their counterpart would be forced to end it also. If a lender would prefer to carry on the agreement for a while, but the borrower is ready to end it, then one party will have to compromise. This means that capital will not be used to it's maximum efficiency across the entire economy.
In any economy, peoples and firms attitude towards risk has a large impact on their spending habits, if they feel to have little financial protection, they will be less likely to make large scale investments, like a new factory or a new house. The buyer and the lender may have differing attitudes towards risk, and financial intermediaries can interface these attitudes, with appropriate protections and insurance, effectively calculating risk premiums, and a broad range of options for lenders and borrowers, such as fixed rate or variable mortgages.
Traditionally, two of the key roles of financial intermediaries have been to reduce transaction costs, and to reduce the impact of Asymmetric information. Transaction costs are the costs incurred by arranging and implementing any given financial agreement, and asymmetric information occurs when one party has greater access to information than another party. However, in the past decade or so this is becoming less and less the case. “these factors may once have been central to the role of intermediaries, they are increasingly less relevant†Scholtens and Van Wensveen (2000). So in a theoretical economy without financial intermediation, it is perfectly plausible that alternative solutions could be found to these issues, such as perhaps “signalling and screening†Akerlof, Spence and Stiglitz (2001) for Asymmetric information problems, and there are various ways in which investment in ICT can reduce ICT costs (see Appendix 1)
I think I need to find some more good references, and appendix 1 is going to be this
The transaction costs approach is a powerful theory that describes the potential of information technology to improve information flow and to reduce transaction costs, thereby improving the efficiency of the economic system. This paper has, however, shown that in order to achieve this goal, a more informed approach to the study of the effects of ICT is required. Transaction costs in fact often increase as a consequence of the adoption of ICT. Lower transaction costs can be achieved when the costs associated with ICT adoption do not exceed the cost of the externalities that are affected by this adoption. When this occurs, the usefulness of the strategy producing such a result has expired.
This paper has shown that the externalities linked to ICT can alter from being positive, to becoming negative. The adoption of ICT in this setting will result in significantly increased transaction costs because of the associated extra costs required to accommodate the more complex environment that emerges as a consequence of the effects of externalities. The use of information technology will subsequently be unable to establish the conditions for a more efficient economic system, but will contribute to the creation of electronic disorder and sub-optimal economic results. Accordingly, the use of ICT may present diseconomies of scale when the externalities associated with its diffusion reach a particular level (Cordella, 2001).
The traditional strategy of ICT adoption, based on transaction cost theory utilising ICT to increase information availability, is undoubtedly efficient when accelerating and increasing the amount of information available and its exchange. ICT makes economic exchanges easier and more efficient, reducing search, negotiation and enforcement costs.
In order to account for the consequences of ICT, externalities, and the associated effects on the coordination of exchanges, an approach other than the traditional one has to be identified. This is required in order to avoid the failure of the economic system as a consequence of high search, negotiation and enforcement costs. By reducing the amount of information, filtering it appropriately, and reducing coordination needs, it is possible to decrease costs while maintaining an efficient economic system when these conditions are met.
The ideas proposed in this paper offer a theoretical explanation for the proliferation of alternative, sometimes opposite strategies, in the design and adoption of ICT to reduce transaction costs. These strategies either conceive ICT as a powerful instrument that increases the amount of information managed in support of transacting on economic exchanges, or see ICT as a powerful tool to reduce the complexity and the amount of information to be considered while transacting.
This paper has shown that the externalities linked to ICT can alter from being positive, to becoming negative. The adoption of ICT in this setting will result in significantly increased transaction costs because of the associated extra costs required to accommodate the more complex environment that emerges as a consequence of the effects of externalities. The use of information technology will subsequently be unable to establish the conditions for a more efficient economic system, but will contribute to the creation of electronic disorder and sub-optimal economic results. Accordingly, the use of ICT may present diseconomies of scale when the externalities associated with its diffusion reach a particular level (Cordella, 2001).
The traditional strategy of ICT adoption, based on transaction cost theory utilising ICT to increase information availability, is undoubtedly efficient when accelerating and increasing the amount of information available and its exchange. ICT makes economic exchanges easier and more efficient, reducing search, negotiation and enforcement costs.
In order to account for the consequences of ICT, externalities, and the associated effects on the coordination of exchanges, an approach other than the traditional one has to be identified. This is required in order to avoid the failure of the economic system as a consequence of high search, negotiation and enforcement costs. By reducing the amount of information, filtering it appropriately, and reducing coordination needs, it is possible to decrease costs while maintaining an efficient economic system when these conditions are met.
The ideas proposed in this paper offer a theoretical explanation for the proliferation of alternative, sometimes opposite strategies, in the design and adoption of ICT to reduce transaction costs. These strategies either conceive ICT as a powerful instrument that increases the amount of information managed in support of transacting on economic exchanges, or see ICT as a powerful tool to reduce the complexity and the amount of information to be considered while transacting.
From a journal entry I found.
Thanks in advance!
Madden lolz
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