Financial instability's ripple effect hampers economy, limits investment opportunities.
Financial instability caused by asymmetric information can have a domino effect on the economy. When parties in financial contracts don't have all the information, they may limit their investments to avoid losses. This can lead to a decrease in money supply, fewer investment opportunities, and a drop in overall economic activity. Researchers have studied this issue and found that increasing asymmetric information can create a negative multiplier effect in the financial system, causing widespread economic problems.