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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)

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

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 26 pages
Date of creation: 12 Mar 2002
Date of revision:
Handle: RePEc:hhs:bofrdp:2002_005

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.bof.fi/en/tutkimus
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Related research
Keywords: allocation of talent; asymmetric information; financial institutions; venture capital; institutional equilibrium;

Other versions of this item:

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G00 - Financial Economics - - General - - - General
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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.)

  1. Kauko, Karlo, 2002. "Links between securities settlement systems: An oligopoly theoretic approach," Research Discussion Papers 27/2002, Bank of Finland. [Downloadable!]
  2. Oana Secrieru & Marianne Vigneault, 2004. "Public Venture Capital and Entrepreneurship," Working Papers 04-10, Bank of Canada. [Downloadable!]
  3. Robin Boadway & Jean-Francois Tremblay, 2003. "Public Economics and Startup Entrepreneurs," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  4. Vesala , Timo, 2004. "Asymmetric information in credit markets and entrepreneurial risk taking," Research Discussion Papers 14/2004, Bank of Finland. [Downloadable!]
  5. Tuomas Takalo & Otto Toivanen, 2004. "Equilibrium in financial markets with adverse selection," Finance 0405001, EconWPA. [Downloadable!]
    Other versions:
  6. 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 CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  7. Granlund , Peik, 2002. "Bank exit legislation in US, EU and Japanese financial centres," Research Discussion Papers 25/2002, Bank of Finland. [Downloadable!]
  8. Peik Granlund, 2004. "Bank exit legislation in US, EU and Japanese financial centres," Finance 0405015, EconWPA. [Downloadable!]
  9. Mikko Niskanen, 2004. "Lender of last resort and the moral hazard problem," Macroeconomics 0405016, EconWPA. [Downloadable!]
  10. Matti Keloharju & Markku Malkamäki & Kjell G. Nyborg & Kristian Rydqvist, 2004. "A descriptive analysis of the Finnish treasury bond market 1991–1999," Finance 0405017, EconWPA. [Downloadable!]
    Other versions:
  11. Karlo Kauko, 2004. "Links between securities settlement systems: An oligopoly theoretic approach," Industrial Organization 0405003, EconWPA. [Downloadable!]
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