Market Failure — applications of principal agent theory

Just some thoughts that need expanding:

The collapse of the financial systems provides demonstrations of how the assymetry of information can undermine the foundation of a sound, efficient market system.  Evidence of adverse selection (principal lacks sufficient information to select the best agent) and moral hazard (principal lacks information necessary to understand whether the agent is performing as contracted).  Self-regulation clearly struggles to meet these two challenges, and that is where public interest, and public value, justify public intervention into market regulation.

Washington Post analysis on the possibel demise of American style Capitalism describes the failures:

Given that the United States has held itself up as a global economic model, the change could shift the balance of how governments around the globe conduct free enterprise. Over the past three decades, the United States led the crusade to persuade much of the world, especially developing countries, to lift the heavy hand of government from finance and industry.

But the hands-off brand of capitalism in the United States is now being blamed for the easy credit that sickened the housing market and allowed a freewheeling Wall Street to create a pool of toxic investments that has infected the global financial system. Heavy intervention by the government, critics say, is further robbing Washington of the moral authority to spread the gospel of laissez-faire capitalism.

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