How reduced information costs in turn lower transaction cost

Reference no: EM131313481

The following is an excerpt taken from a November 30, 2007, speech entitled "Innovation, Information, and Regulation in Financial Markets" by Federal Reserve Governor Randall S. Kroszner (www. federalreserve.gov/newsevents/speech/kroszner20071130a.htm)

Another consequence of information investments is a tendency towards greater standardization of many of the aspects of an instrument, which can help to increase transparency and reduce complexity. ... Standardization in the terms and in the contractual rights and obligations of purchasers and sellers of the product reduces the need for market participants to engage in extensive efforts to obtain information and reduces the need to verify the information that is provided in the market through due diligence.

Reduced information costs in turn lower transaction costs, thereby facilitating price discovery and enhancing market liquidity. Also, standardization can reduce legal risks because litigation over contract terms can result in case law that applies to similar situations, thus reducing uncertainty.

Answer the following questions pertaining to the statement:

a. What does Governor Kroszner mean when he says standardization "reduces the need for market participants to engage in extensive efforts to obtain information and reduces the need to verify the information that is provided in the market through due diligence"?

b. How do "Reduced information costs in turn lower transaction costs, thereby facilitating price discovery and enhancing market liquidity"?

Reference no: EM131313481

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