Knowledge that Transforms

The objective of this paper is to compare the effectiveness of financial markets and financial intermediaries in financing new industries and technologies in the presence of diversity of opinion. In markets, investors become informed about the details of the new industry or technology and make their own investment decisions. In intermediaries, the investment decision is delegated to a manager, who is the only one who needs to become informed, which saves on information costs, but investors may anticipate disagreement with the manager and be unwilling to provide funds. Financial markets tend to be superior when there is significant diversity of opinion and information is inexpensive. Journal of Economic Literature Classification Numbers: G1, G2.

Households and businesses in the U.S. prefer to use checks over less costly means of payment. Earlier studies have focused on check “float” as an explanation for the continued popularity of this seemingly inefficient technology. We construct a general equilibrium model of check payment and show that the presence of float does not necessarily lead to inefficiency. However, we also identify two potential sources of inefficiency associated with check float: (1) if float is not always priced, then it acts as a distorting tax, and (2) inefficiencies can result if people engage in costly activities designed to accelerate check presentment. Journal of Economic Literature Classification Numbers: E58, G21, G28.

We compare institutional execution costs across the major U.S. exchanges using a sample of institutional equity orders in firms that switch exchanges. Execution costs including commissions are essentially indistinguishable across these exchanges. We also find the fraction of trading volume from momentum traders is greater on the NYSE than either the Nasdaq or AMEX and that orders are more likely to be worked by an institution's trading desk on the NYSE than on the Nasdaq. These results suggest that institutions actively manage execution strategies, taking into account characteristics of the markets in which they trade.