Financial Globalization and Crony Capitalism
John P. Tiemstra, Professor of Economics and Business
CrossCurrents
Spring 2006

Many economic transactions are characterized by asymmetric information; that is, one of the parties is more aware of or has more control over the circumstances and performance of the transaction than the other party has. This is particularly true when money is lent. The borrower typically has a better idea of and more control over what the money will be used for, and the risks involved in that use, than the lender does. Any transaction that involves the extension of credit or the expectation of future performance by one party may have similar characteristics. Asymmetric information can inhibit transactions if lenders believe that borrowers will typically behave in opportunistic fashion and exploit their informational advantage. At worst, the financial system could be dysfunctional and economic development could be
retarded.

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Reprinted by permission of CrossCurrents, www.crosscurrents.org.