Asymmetric information, option to wait to invest and the optimal level of investment
AbstractThis paper analyzes equilibrium rationing on credit markets in the case of gains from waiting to acquire information about the future profitability of investment. We compare the competitive outcome with the socially optimal level of investment. We show that the opportunity to postpone investment changes the nature of the inefficiencies of the competitive outcome fundamentally. Without the option to wait, high risk firms tend to invest and the outcome is characterized by a situation of underinvestment. If firms can wait high risk firms benefit the most from waiting. In this case low risk firms tend to invest immediately and a situation of overinvestment will result, since from the banks' point of view firms do not delay enough.
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Bibliographic InfoPaper provided by University of Groningen, CCSO Centre for Economic Research in its series CCSO Working Papers with number 199917.
Date of creation: 1999
Date of revision:
Other versions of this item:
- Lensink, Robert & Sterken, Elmer, 2001. "Asymmetric information, option to wait to invest and the optimal level of investment," Journal of Public Economics, Elsevier, vol. 79(2), pages 365-374, February.
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