Adverse Selection and Risk Aversion in Capital Markets
AbstractWe generalize the Boadway and Keen (2006) model of adverse selection in a capital market to allow for risk aversion on the part of entrepreneurs. We show that the Boadway and Keen conclusion-that adverse selection leads to excessive investment-does not necessarily hold when entrepreneurs are risk averse. We use their framework, with the additional assumption of risk aversion, to analyze the effect of policies that would reduce entrepreneurs' reliance on debt or equity financing by outside investors. We show that such policies, by exposing entrepreneurs to more down-side risk, may reduce the level of investment in risky projects, increase inequality and potentially reduce social welfare.
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Bibliographic InfoPaper provided by University of Alberta, Department of Economics in its series Working Papers with number 2009-15.
Length: 31 pages
Date of creation: 16 Mar 2009
Date of revision: 24 Mar 2009
adverse selection; capital markets; inefficiency; risk and entrepreneurship;
Other versions of this item:
- Luis H. B. Braido & Carlos E. da Costa & Bev Dahlby, 2011. "Adverse Selection and Risk Aversion in Capital Markets," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 67(4), pages 303-326, December.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-04-05 (All new papers)
- NEP-CTA-2009-04-05 (Contract Theory & Applications)
- NEP-ENT-2009-04-05 (Entrepreneurship)
- NEP-UPT-2009-04-05 (Utility Models & Prospect Theory)
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.:
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- Esteban Jaimovich, 2008.
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Carlo Alberto Notebooks
78, Collegio Carlo Alberto.
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- Clemens Fuest & Bernd Huber & Philipp Tillessen, 2003. "Tax Policy and Entrepreneurship in the Presence of Asymmetric Information in Capital Markets," CESifo Working Paper Series 872, CESifo Group Munich.
- Robin Boadway & Michael Keen, 2006. "Financing and Taxing New Firms under Asymmetric Information," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(4), pages 471-502, December.
- Hellmann, Thomas & Stiglitz, Joseph, 2000. "Credit and equity rationing in markets with adverse selection," European Economic Review, Elsevier, vol. 44(2), pages 281-304, February.
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- Mark Parsons, 2011. "Rewarding Innovation: Improving Federal Tax Support for Business R&D in Canada," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 334, September.
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