Capital market imperfections
What are capital market imperfections?
Restrictions in capital markets that limit the amount of financial contracts that can be signed by agents are labelled as imperfections. Contracts that contain limitations that prevent them from be carried out are also labelled this way.
Where have you heard about capital market imperfections?
Capital market imperfections are very common. In fact, most economists do not think it is even possible to have a perfectly competitive market, and many think such a market would be undesirable.
What you need to know about capital market imperfections.
There are three main reasons why imperfections are common in capital markets. The first is that all the necessary information about the borrower is often not available to the lender, therefore they can't assess whether they are willing or able to pay their debt. Secondly, lenders need to have faith that borrowers will commit to paying back their debts or a third-party enforcer must be brought in. Lastly, as exchanges do not take place immediately, there is often room for negotiation.
Find out more about capital market imperfections.
To learn more, take a look at our page on capital markets.