{
  "title": "Financial Innovation and Risk, the Role of Information",
  "publication": "IMF Working Papers, November 1, 2010",
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  "summary": "Financial innovation has increased diversification opportunities and lowered investment costs, but has not reduced the relative cost of active (informed) investment strategies relative to passive (less informed) strategies. What are the consequences?",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Financial innovation has increased diversification opportunities and lowered investment costs, but has not reduced the relative cost of active (informed) investment strategies relative to passive (less informed) strategies.\n- The paper studies an economy with linear production technologies, some more risky than others.\n- Investors can use low quality public information or collect high quality, but costly, private information.\n- Information helps avoid excessively risky investments.\n- Financial innovation lowers the incentives for private information collection and deteriorates public information: the economy invests more often in excessively risky technologies.\n- This change in investment behavior alters business cycle properties and can reduce welfare by increasing the likelihood of \"liquidation crises\"."
    },
    {
      "heading": "Key Findings and Mechanisms",
      "content": "- Financial innovation increases diversification and lowers transaction/investment costs.\n- Despite cost reductions, the relative cost of active (informed) strategies remains higher than passive strategies, leading to reduced private information acquisition.\n- Lower private information collection and deterioration of public information together cause more frequent investments in excessively risky production technologies.\n- The shift toward riskier investments affects business cycle dynamics and raises the probability of severe outcomes described as \"liquidation crises\"."
    },
    {
      "heading": "Policy-Relevant Implications",
      "content": "- Changes in information provision and incentives for private information collection are central to assessing the systemic risk consequences of financial innovation.\n- Policies that only focus on lowering transaction costs without addressing incentives for information acquisition may inadvertently increase systemic risk and the likelihood of liquidation crises.\n- Strengthening mechanisms that preserve or enhance incentives for private information acquisition, or improving the quality of public information, could mitigate the welfare costs associated with some forms of financial innovation."
    },
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      "heading": "Publication and Metadata",
      "content": "- Author: Roberto Piazza\n- Date: November 1, 2010\n- Series: Working Paper No. 2010/266\n- Issue: 266\n- Volume: 2010\n- Pages: 31\n- DOI: https://doi.org/10.5089/9781455210732.001\n- Stock No: WPIEA2010266\n- ISBN: 9781455210732\n- ISSN: 1018-5941\n- Preview citation format (Chicago): Roberto Piazza. \"Financial Innovation and Risk, the Role of Information\", IMF Working Papers 2010, 266 (2010), accessed 9/17/2026, https://doi.org/10.5089/9781455210732.001\n- Subjects: Business cycles, Financial sector development, Moral hazard, Systemic risk, Technology\n- Keywords: appendix E, business cycle, mover accent, WP\n\nIMF Working Papers — Financial Innovation and Risk, the Role of Information, Roberto Piazza, Working Paper No. 2010/266 (November 1, 2010).\n\n---\n\n Content in this bundle\n\n- Wp10266\n  - Wp10266 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Wp10266 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/financial-innovation-and-risk-the-role-of-information-24372"
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    "Authors: Roberto Piazza",
    "Published: November 1, 2010",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781455210732.001",
    "Financial innovation has increased diversification opportunities and lowered investment costs, but has not reduced the relative cost of active (informed) investment strategies relative to passive (less informed) strategies.",
    "The paper studies an economy with linear production technologies, some more risky than others.",
    "Investors can use low quality public information or collect high quality, but costly, private information.",
    "Information helps avoid excessively risky investments.",
    "Financial innovation lowers the incentives for private information collection and deteriorates public information: the economy invests more often in excessively risky technologies.",
    "This change in investment behavior alters business cycle properties and can reduce welfare by increasing the likelihood of \"liquidation crises\".",
    "Financial innovation increases diversification and lowers transaction/investment costs.",
    "Despite cost reductions, the relative cost of active (informed) strategies remains higher than passive strategies, leading to reduced private information acquisition.",
    "Lower private information collection and deterioration of public information together cause more frequent investments in excessively risky production technologies.",
    "The shift toward riskier investments affects business cycle dynamics and raises the probability of severe outcomes described as \"liquidation crises\".",
    "Changes in information provision and incentives for private information collection are central to assessing the systemic risk consequences of financial innovation.",
    "Policies that only focus on lowering transaction costs without addressing incentives for information acquisition may inadvertently increase systemic risk and the likelihood of liquidation crises.",
    "Strengthening mechanisms that preserve or enhance incentives for private information acquisition, or improving the quality of public information, could mitigate the welfare costs associated with some forms of financial innovation.",
    "Author: Roberto Piazza",
    "Date: November 1, 2010",
    "Series: Working Paper No. 2010/266",
    "Issue: 266",
    "Volume: 2010",
    "Pages: 31",
    "DOI: https://doi.org/10.5089/9781455210732.001",
    "Stock No: WPIEA2010266",
    "ISBN: 9781455210732",
    "ISSN: 1018-5941",
    "Preview citation format (Chicago): Roberto Piazza. \"Financial Innovation and Risk, the Role of Information\", IMF Working Papers 2010, 266 (2010), accessed 9/17/2026, https://doi.org/10.5089/9781455210732.001",
    "Subjects: Business cycles, Financial sector development, Moral hazard, Systemic risk, Technology",
    "Keywords: appendix E, business cycle, mover accent, WP",
    "**Wp10266**"
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