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Adverse Selection and Security Design

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Author Info
Rahi, Rohit

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Abstract

This paper studies the problem of optimal security design by a privately informed entrepreneur. In the context of a simple parametric model, it is shown that the entrepreneur does not find it profitable to float an asset that affords her an informational advantage. The reason is that, with rational, uninformed outside investors, the entrepreneur faces adverse selection in the security market, which prevents her from exploiting her position as an insider. This is true whether or not she has market power in trading the asset. Copyright 1996 by The Review of Economic Studies Limited.

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Publisher Info
Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 63 (1996)
Issue (Month): 2 (April)
Pages: 287-300
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Handle: RePEc:bla:restud:v:63:y:1996:i:2:p:287-300

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0034-6527

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Walter Garcia-Fontes & Hugo Hopenhayn, 2000. "Entry restrictions and the determination of quality," Spanish Economic Review, Springer, vol. 2(2), pages 105-127. [Downloadable!] (restricted)
    Other versions:
  2. Albert Marcet, 1991. "Simulation Analysis of Dynamic Stochastic Models: Applications to Theory and Estimation," Economics Working Papers 6, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  3. Rahi, Rohit, 1996. "Adverse Selection and Security Design," Review of Economic Studies, Blackwell Publishing, vol. 63(2), pages 287-300, April. [Downloadable!] (restricted)
    Other versions:
  4. Cabrales, Antonio & Hoshi, Takeo, 1996. "Heterogeneous beliefs, wealth accumulation, and asset price dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 20(6-7), pages 1073-1100. [Downloadable!] (restricted)
    Other versions:
  5. Bosch-Domenech, Antoni, 1991. "Economies of scale, location, age, and sex discrimination in household demand," European Economic Review, Elsevier, vol. 35(8), pages 1589-1595, December. [Downloadable!] (restricted)
  6. German Rojas, 1993. "Optimal Taxation in a Stochastic Growth Model with Public Capital: Crowding-in Effects and Stabilization Policy," Economics Working Papers 62, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  7. Massimo Motta & George Norman, 1993. "Does Economic Integration Cause Foreign Direct Investment?," Economics Working Papers 28, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  8. Antonio Cabrales, 1993. "Stochastic Replicator Dynamics," Economics Working Papers 54, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  9. Juan P. Nicolini, 1992. "Ruling out Speculative Hyperinflations: A Game Theoretic Approach," Economics Working Papers 14, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  10. Ramon Marimon, 1993. "Adaptive Learning, Evolutionary Dynamics and Equilibrium Selection in Games," Economics Working Papers 23, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  11. Albert Satorra, 1992. "The Variance Matrix of Sample Second-order Moments in Multivariate Linear Relations," Economics Working Papers 8, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  12. Albert Marcet & Thomas J. Sargent, 1992. "Speed of Convergence of Recursive Least Squares Learning with ARMA Perceptions," Economics Working Papers 15, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  13. Ramon Marimon & Shyam Sunder, 1993. "Expectations and Learning Under Alternative Monetary Regimes: An Experimental Approach," Economics Working Papers 37, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  14. Giorgia Giovannetti & Albert Marcet & Ramon Marimon, 1993. "Growth, Capital Flows and Enforcement Constaints: The Case of Africa," Economics Working Papers 22, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  15. Daniel Serra, 1993. "The Coherent Covering Location Problem," Economics Working Papers 20, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  16. Antoni Bosch-Domènech, 1991. "Economies of Scale, Location, Age and Sex Discrimination in Household Demand," Economics Working Papers 2, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  17. Daniel Serra & Charles Revelle, 1992. "The PQ-Median Problem: Location and Districting of Hierarchical Facilities. Part I," Economics Working Papers 12, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  18. Dr. Peter Kenning & Hilke Plassmann, 2004. "NeuroEconomics," Experimental 0412005, EconWPA. [Downloadable!]
  19. Hugo A. Hopenhayn & Ingrid M. Werner, 1993. "Information, Liquidity and Asset Trading in a Random Matching Game," Economics Working Papers 19, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  20. Xavier Calsamiglia & Alan Kirman, 1991. "A Unique Informationally Efficient and Decentralized Mechanism with Fair Outcomes," Economics Working Papers 7, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  21. Juan P. Nicolini, 1993. "More on the Time Inconsistency of Optimal Monetary Policy," Economics Working Papers 56, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  22. Satorra, Albert, 1992. "The variance matrix of sample second-order moments in multivariate linear relations," Statistics & Probability Letters, Elsevier, vol. 15(1), pages 63-69, September. [Downloadable!] (restricted)
  23. Jordi Galí, 1993. "Local Externalities, Convex Adjustment Costs and Sunspot Equilibria," Economics Working Papers 43, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  24. Albert Marcet, 1991. "Solving Non-Linear Stochastic Models by Parameterizing Expectations: An Application to Asset Pricing with Production," Economics Working Papers 5, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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