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Information Assymetry: The Rebirth of a Borrower's Power

18 Oct 2016 5:29 PM -

Since the beginning of time commerce has evolved around the seller have access to more information than the buyer.  This dynamic creates an imbalance of power with the seller being able to seek influential price advantage over the buyer with the buyer providing nothing more than the vacant look of an Egyptian death mask.  In these instances, the seller takes the high road with the information advantage and the buyer usually makes sub-optimal decisions. In extreme cases, causes the transaction to go awry to the detriment of the buyer. 


 

A quintessential example is when a seller of a car knows the intimate mechanical failures of the vehicle and the buyer doesn’t.   A transaction is concluded in the sellers favour with this information withheld.

It can be argued that this is a form of market failure is simply due to the lack of accessible information being available to all parties in order to balance the equation of negotiation to information parity as any neo-classical economist would explain. 

From a high vantage point, it can be witnessed that digital information has certainly broken down many traditional trading platforms to the buyer’s advantage.  For anyone buying a second hand car today can conduct deep research into comparative makes, models and pricing at the tip of their fingertips.  The second hand car salesman is rapidly losing their information advantage to conduct moral hazard within their trade.

Business lending sits on the other end of the spectrum.  It is a complex matrix of business risk assessment, regulated banking policy, non-homogenous product and capitalism feeding a mandate for profitability.

For a business to borrow money (agribusiness or commercial alike), a deep profound knowledge of these inter-related economic and legislative relationships within the banking system is most likely to be minimal at best (unless they have had a career in banking).  Unlike Google empowering the second hand car purchaser, there is a profound knowledge gap between buyer and seller of business banking product (loan structures, interest rate price, terms and conditions).

This knowledge gap cannot be filled by Google research, nor is it in the best interests of the banks to say “…hey, this is almost the best deal we can give whilst being mindful that our shareholders would like a good dividend this year, but I think the bank in Lowratesville can give you better because your business profile of x, y and z fits their policy better than ours….”

Financial cartography is mapping your business into the world of business banking.  If your business entails significant borrowings, then consider forming an alliance with a professional that can bring neo-classical economics into your business and balance the equation of funding negotiations.

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