Risk, Adverse Selection and Capital Market Failure
AbstractThis paper investigates the implications of adverse selection for capital market equilibrium when borrowers are risk averse. K. J. Arrow and R. C. Lind (1970) argue that when capital markets fail to spread risk properly interest rates are too high. The market adds a risk premium that the social planner would not. This paper shows that when projects differ in quality, in a pooling equilibrium, the private market sets interest rates too low even accounting for the risk premium. Hence, there is overinvestment. The result is shown to be robust to the introduction of moral hazard. Copyright 1990 by Royal Economic Society.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoArticle provided by Royal Economic Society in its journal The Economic Journal.
Volume (Year): 100 (1990)
Issue (Month): 399 (March)
Contact details of provider:
Postal: Office of the Secretary-General, School of Economics and Finance, University of St. Andrews, St. Andrews, Fife, KY16 9AL, UK
Phone: +44 1334 462479
Web page: http://www.res.org.uk/
More information through EDIRC
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Xavier Gin� & Pamela Jakiela & Dean Karlan & Jonathan Morduch, 2010.
American Economic Journal: Applied Economics,
American Economic Association, vol. 2(3), pages 60-95, July.
- Gine, Xavier & Jakiela, Pamela & Karlan, Dean & Morduch, Jonathan, 2006. "Microfinance games," Policy Research Working Paper Series 3959, The World Bank.
- Xavier Gine & Pamela Jakiela & Dean Karlan & Jonathan Morduch, 2006. "Microfinance games," Framed Field Experiments 00150, The Field Experiments Website.
- Xavier Gine & Pamela Jakiela & Dean Karlan & Jonathan Morduch, 2006. "Microfinance Games," Working Papers 2102, The Field Experiments Website.
- Dean Karlan & Xavier Gine & Jonathan Morduch & Pamela Jakiela, 2006. "Microfinance Games," Working Papers 936, Economic Growth Center, Yale University.
- M. V. Ibrahimo & Carlos Pestana Barros, 2008.
"Relevance or Irrelevance of Capital Structure,"
Working Papers Department of Economics
2008/32, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
- M. V. Ibrahimo & C. P. Barros, 2010. "Capital Structure, Risk and Asymmetric Information: Theory and Evidence," Working Papers Department of Economics 2010/05, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
- Muradali V. Ibrahimo & Carlos P. Barros, 2009. "Unlearned Lessons from Risk, Debt Service, Bank Credit, and Asymmetric Information," Working Papers Department of Economics 2009/43, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
- Parker, Simon C, 2002. "Do Banks Ration Credit to New Enterprises? And Should Governments Intervene? President's Lecture Delivered at the Annual General Meeting of the Scottish Economic Society 4-5 September 2001," Scottish Journal of Political Economy, Scottish Economic Society, vol. 49(2), pages 162-95, May.
- Pooran Wynarczyk & Robert Watson, 2005. "Firm Growth and Supply Chain Partnerships: An Empirical Analysis of U.K. SME Subcontractors," Small Business Economics, Springer, vol. 24(1), pages 39-51, February.
- Jose L Wynne, 2001. "Financial Frictions in Business Cycles, Trade and Growth," Levine's Working Paper Archive 625018000000000127, David K. Levine.
- Bas Jacobs & Sweder J. G. van Wijnbergen, 2007.
"Capital-Market Failure, Adverse Selection, and Equity Financing of Higher Education,"
FinanzArchiv: Public Finance Analysis,
Mohr Siebeck, Tübingen, vol. 63(1), pages 1-32, March.
- Bas Jacobs & Sweder J.G. van Wijnbergen, 2005. "Capital Market Failure, Adverse Selection and Equity Financing of Higher Education," Tinbergen Institute Discussion Papers 05-037/3, Tinbergen Institute.
- Robert E. Carpenter & Bruce C. Petersen, 2002. "Capital Market Imperfections, High-Tech Investment, and New Equity Financing," Economic Journal, Royal Economic Society, vol. 112(477), pages F54-F72, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.