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Asymmetric Information, Entrepreneurial Activity, and the Scope of Fiscal Policy in an Open Regional Economy

Author

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  • Amitrajeet A. Batabyal

    (Department of Economics, Rochester Institute of Technology, Rochester, NY, USA, aabgsh@rit.edu)

  • Peter Nijkamp

    (Department of Spatial Economics, Free University, Amsterdam, Netherlands)

Abstract

The authors analyze two hitherto little studied but salient questions concerning the trinity of asymmetric information, entrepreneurial activity, and the scope of fiscal policy in an open regional economy. First, the authors use a two-period model to analyze the contractual relationship between entrepreneurs and venture capitalists when the latter are located outside the region. Because there is moral hazard, venture capitalists do not offer entrepreneurs the first best investment contract and entrepreneurial activity is suboptimal. Second, they analyze a two-period model with venture capitalists who are now located inside the regional economy. They show that despite the existence of a credit market imperfection, because, inter alia, the regional authority (RA) does not have an informational advantage over the private sector, it is not possible for this RA to use fiscal policy to make a Pareto improving intervention in which some agents are better off and others are no worse off.

Suggested Citation

  • Amitrajeet A. Batabyal & Peter Nijkamp, 2010. "Asymmetric Information, Entrepreneurial Activity, and the Scope of Fiscal Policy in an Open Regional Economy," International Regional Science Review, , vol. 33(4), pages 421-436, October.
    • Handle: RePEc:sae:inrsre:v:33:y:2010:i:4:p:421-436
    DOI: 10.1177/0160017610375442
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    References listed on IDEAS

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    1. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, December.
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    3. Edward L. Glaeser & William R. Kerr, 2009. "Local Industrial Conditions and Entrepreneurship: How Much of the Spatial Distribution Can We Explain?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(3), pages 623-663, September.
    4. G. C. Reid & N. G Terry & J. A. Smith, 1997. "Risk management in venture capital investor-investee relations," The European Journal of Finance, Taylor & Francis Journals, vol. 3(1), pages 27-47, March.
    5. Zoltan J. Acs & Henri L. F. Groot & Peter Nijkamp (ed.), 2002. "The Emergence of the Knowledge Economy," Advances in Spatial Science, Springer, number 978-3-540-24823-1, Fall.
    6. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(3), pages 473-494.
    7. Audretsch, David B. & Keilbach, Max, 2008. "Resolving the knowledge paradox: Knowledge-spillover entrepreneurship and economic growth," Research Policy, Elsevier, vol. 37(10), pages 1697-1705, December.
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    Cited by:

    1. Batabyal, Amitrajeet A., 2012. "Project financing, entrepreneurial activity, and investment in the presence of asymmetric information," The North American Journal of Economics and Finance, Elsevier, vol. 23(1), pages 115-122.

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