Suppose an entrepreneur needs funds from a financier to invest in a risky project whose cost is fixed, and whose return may be high or low. Suppose also that the project's realized return is an information that is private to the entrepreneur. If the amount the entrepreneur pays back to the financier depends on the risky project's outcome, if it is costly for the financier to verify the project's true realized return, and if the financier cannot commit to an auditing strategy, then it is optimal for the entrepreneur to misreport the true state of the world with some probability. In other words, it is in the entrepreneur's interest to lie with a degree of probability. We find that the entrepreneur over-finances his project when the financier cannot commit, and that he has greater wealth ex post if the project is not successful. Over-borrowing and greater wealth in the low-return state result in reducing the number of false reports in the economy.
Prenons une économie où un entrepreneur a besoin de financement afin d'entreprendre un projet risqué dont le coût est fixe et dont le rendement peut être faible ou élevé. Supposons alors que ce rendement est une information privée de l'entrepreneur. Si le montant que l'entrepreneur doit rembourser au financier dépend du rendement sur le projet risqué, s'il est coûteux pour le financier de vérifier le rendement réel du projet, et si le financier ne peut se commettre en une stratégie de vérification, alors il devient optimal pour l'entrepreneur de ne pas dire la vérité tout le temps. Nous trouvons premièrement que l'entrepreneur sur-finance son projet d'investissement si le financier ne peut se commettre, et deuxièmement que l'entrepreneur a une plus grande richesse ex post si le projet ne porte pas fruit. Ce sur-financement et cette plus grande richesse dans le mauvais état de la nature sont le produit de l'absence d'engagement de la part du principal qui doit utiliser ces signaux coûteux afin de réduire le nombre de faux messages dans l'économie.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Find related papers by JEL classification: D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
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.:
Khalil, Fahad & Parigi, Bruno M, 1998.
"Loan Size as a Commitment Device,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 135-50, February.
Shleifer, Andrei & Vishny, Robert W, 1997.
" A Survey of Corporate Governance,"
Journal of Finance,
American Finance Association, vol. 52(2), pages 737-83, June.
[Downloadable!] (restricted)
Other versions:
Cited by: (explanations, 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.)