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Risk allocation under symmetric information and market power

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  • Mäschle, Oliver

Abstract

External corporate financing typically involves contracts presenting a majority of the financial risks of the entrepreneurial activity on the entrepreneur. In academic literature, this one-sided risk allocation is usually justified by the informational advantages and unobservable actions of the entrepreneur. This article develops two alternative behavioral explanations for this observation. By conducting a non-computer-based laboratory experiment, we created an environment, in which adverse selection and moral hazard (as classical problems related to asymmetric information) could be eliminated. The fact that resulting contracts between the investors and entrepreneurs in the experiment on average imposed most of the financial risks on the entrepreneur challenges classical academic explanations based on asymmetric information.

Suggested Citation

  • Mäschle, Oliver, 2012. "Risk allocation under symmetric information and market power," Thuenen-Series of Applied Economic Theory 123, University of Rostock, Institute of Economics.
    • Handle: RePEc:zbw:roswps:123
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