A Formal Approach: Capital Market Failures

Joseph E. Stiglitz, José Antonio Ocampo, Shari Spiegel, Ricardo Ffrench-Davis and Deepak Nayyar

in Stability with Growth

Published in print August 2006 | ISBN: 9780199288144
Published online September 2006 | e-ISBN: 9780191603884 | DOI:

Series: Initiative for Policy Dialogue Series

 A Formal Approach: Capital Market Failures

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Underlying the failure of CML was an overly simple model that assumed efficient and complete markets. There are, however, problems with externalities and weak or absent insurance markets, especially in developing countries, that these models did not consider. This chapter focuses on major categories of ‘market failures’. It examines the direct externalities associated with capital flows, and looks at how capital market liberalization can exacerbate the problems posed by coordination failures and broader macroeconomic failures. It also looks at the effect of imperfect information on investor behavior and the market failures associated with capital markets. It concludes with a discussion of the major objectives of government intervention.

Keywords: capital market liberalization; market failures; externalities; incomplete insurance markets; coordination failures; imperfect information; investor behavior; government intervention

Chapter.  3470 words. 

Subjects: Economic Development and Growth

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