Elizabeth is a young woman living in Barbados. She approaches a bank for a loan to purchase a used car that she found online from Japan Motors. The car costs US$5000 and US$2500 for shipping. Once the car arrives the duty required is 100% of the total including shipping. Elizabeth will require a total loan of US$15,000 to pay for the car, shipping and duties. The bank approves the loan and releases the funds to Elizabeth. Elizabeth is a budding entrepreneur and devises a plan to earn some extra money. Rather than wire the US$7500 to Japan Motors and retain the remaining US$7500 to pay the duty, Elizabeth decides to wire the entire amount of US$15,000 to Japan Motors to pay for two cars. Elizabeth plans on selling the second car at a markup and using the profits towards her own car purchase. Eventually, the shipment arrives at the port with both of the cars Elizabeth purchased. However, Elizabeth has a problem because no one has purchased the second car from her yet. This is because there is now a glut in the car market with lots of cars being sold cheaply. This means Elizabeth has no money to pay the duty and both cars remain in the port, costing Elizabeth a penalty for each day they are not cleared. What are the information problems that have occurred here in the financial market and how can they be solved? How do financial institutions try to avoid this problem?
Elizabeth is a young woman living in Barbados. She approaches a bank for a loan to purchase a used car that she found online from Japan Motors. The car costs US$5000 and US$2500 for shipping. Once the car arrives the duty required is 100% of the total including shipping. Elizabeth will require a total loan of US$15,000 to pay for the car, shipping and duties. The bank approves the loan and releases the funds to Elizabeth.
Elizabeth is a budding entrepreneur and devises a plan to earn some extra money. Rather than wire the US$7500 to Japan Motors and retain the remaining US$7500 to pay the duty, Elizabeth decides to wire the entire amount of US$15,000 to Japan Motors to pay for two cars. Elizabeth plans on selling the second car at a markup and using the profits towards her own car purchase. Eventually, the shipment arrives at the port with both of the cars Elizabeth purchased.
However, Elizabeth has a problem because no one has purchased the second car from her yet. This is because there is now a glut in the car market with lots of cars being sold cheaply. This means Elizabeth has no money to pay the duty and both cars remain in the port, costing Elizabeth a penalty for each day they are not cleared.
- What are the information problems that have occurred here in the financial market and how can they be solved?
- How do financial institutions try to avoid this problem?
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