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A Model of Firm Behaviour with Equity Constraints and Bankruptcy Costs

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  • Pedro Mazeda Gil

    (Faculdade de Economia da Universidade do Porto)

Abstract

Based on Greenwald and Stiglitz (1988,1990), this work explores a simple model of microeconomic behaviour which incorporates the impact of capital markets imperfections generated by asymmetric information on firms’ optimal investment decision rules. In particular, this paper analyses how a specific form of asymmetric information problem (adverse selection) may imply lower investment than otherwise through the reduction of the firms’ ability to raise external financing – either in the form of credit rationing or the ‘voluntary’ reduction of firms’ borrowing activity. The natural follow-up to this work would be to formally show how a loan market where both contractual interest rates and loan sizes are (a priori) variable may be characterised by a credit rationing equilibrium.

Suggested Citation

  • Pedro Mazeda Gil, 2003. "A Model of Firm Behaviour with Equity Constraints and Bankruptcy Costs," FEP Working Papers 134, Universidade do Porto, Faculdade de Economia do Porto.
    • Handle: RePEc:por:fepwps:134
    as

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    References listed on IDEAS

    as
    1. Aizenman, Joshua & Powell, Andrew, 2003. "Volatility and financial intermediation," Journal of International Money and Finance, Elsevier, vol. 22(5), pages 657-679, October.
    2. Bruce C. Greenwald & Joseph E. Stiglitz, 1990. "Macroeconomic Models with Equity and Credit Rationing," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 15-42, National Bureau of Economic Research, Inc.
    3. Stiglitz, Joseph E., 1992. "Capital markets and economic fluctuations in capitalist economies," European Economic Review, Elsevier, vol. 36(2-3), pages 269-306, April.
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    6. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    7. Dwight M. Jaffee & Thomas Russell, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 651-666.
    8. Greenwald, Bruce C & Stiglitz, Joseph E, 1990. "Asymmetric Information and the New Theory of the Firm: Financial Constraints and Risk Behavior," American Economic Review, American Economic Association, vol. 80(2), pages 160-165, May.
    9. Greenwald, Bruce & Stiglitz, Joseph E & Weiss, Andrew, 1984. "Informational Imperfections in the Capital Market and Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 74(2), pages 194-199, May.
    10. Stephen D. Williamson, 1987. "Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(1), pages 135-145.
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