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Financial institutions and the allocation of talent

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Author Info

  • Kanniainen, Vesa

    (University of Helsinki)

  • Leppämäki, Mikko

    (Bank of Finland Research)

Abstract

The paper shows that uninformed finance gives rise to excessive entry, both in human-capital-intensive and in conventional industries when the financial institutions cannot identify the entrepreneurial talent. Introduction of informed capital (eg venture capital finance) with superior screening ability results in an institutional equilibrium with efficiency gains in human-capital industries. Contrary to received wisdom, the institutional equilibrium with informed capital is characterised by more limited entry to an industry, which requires highly talented human capital. Unexpectedly, the total welfare effect is ambiguous, as the allocation of non-informed capital is now less efficient in the conventional industry. The institutional equilibrium is shaped by investors’ risk preferences, costs of establishing uninformed and informed capital, and the initial distribution ot talent in the economy.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0205.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 5/2002.

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Length: 26 pages
Date of creation: 12 Mar 2002
Date of revision:
Handle: RePEc:hhs:bofrdp:2002_005

Contact details of provider:
Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Related research

Keywords: allocation of talent; asymmetric information; financial institutions; venture capital; institutional equilibrium;

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Cited by:
  1. Matti Keloharju & Markku Malkamäki & Kjell G. Nyborg & Kristian Rydqvist, 2004. "A descriptive analysis of the Finnish treasury bond market 1991–1999," Finance 0405017, EconWPA.
  2. Takalo, Tuomas & Toivanen, Otto, 2003. "Equilibrium in financial markets with adverse selection," Research Discussion Papers 6/2003, Bank of Finland.
  3. Vesa Kanniainen & Seppo Kari & Jouko Ylä-Liedenpohja, 2005. "The Start-Up and Growth Stages in Enterprise Formation: The “New View” of Dividend Taxation Reconsidered," CESifo Working Paper Series 1476, CESifo Group Munich.
  4. Vesala , Timo, 2004. "Asymmetric information in credit markets and entrepreneurial risk taking," Research Discussion Papers 14/2004, Bank of Finland.
  5. Kauko, Karlo, 2002. "Links between securities settlement systems: An oligopoly theoretic approach," Research Discussion Papers 27/2002, Bank of Finland.
  6. Robin Boadway & Jean-François Tremblay, 2003. "Public Economics and Startup Entrepreneurs," CESifo Working Paper Series 877, CESifo Group Munich.
  7. Oana Secrieru & Marianne Vigneault, 2004. "Public Venture Capital and Entrepreneurship," Working Papers 04-10, Bank of Canada.
  8. Peik Granlund, 2004. "Bank exit legislation in US, EU and Japanese financial centres," Finance 0405015, EconWPA.
  9. Mikko Niskanen, 2004. "Lender of last resort and the moral hazard problem," Macroeconomics 0405016, EconWPA.

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