I investigate a model in which two parties A and B invest sequentially in a joint project (an asset). Investments and the asset value are nonverifiable, and A is wealth-constrained so that an initial outlay must be financed by either an agent, B (insider financing), or an external investor, a bank C (outsider financing). I show that an option contract in combination with a loan arrangement facilitates first-best investments and any arbitrary distribution of surplus if renegotiation is infeasible. Moreover, the optimal strike price of the option is shown to differ across financing modes. If renegotiation is admitted, I identify conditions under which the first best can still be attained. Then, either B-financing or C-financing may be strictly preferable, and a combination of insider and outsider financing may be strictly optimal. Ordering information: This article can be ordered from https://pubs3.rand.org/cgi-bin/rje/pdf.cgi.
Download Info
To 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.
Volume (Year): 36 (2005) Issue (Month): 4 (Winter) Pages: 753-770 Download reference. The following formats are available: HTML
(with abstract),
plain text
(with abstract),
BibTeX,
RIS (EndNote, RefMan, ProCite),
ReDIF