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Information Acquisition and Government Intervention in Credit Markets

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  • Boadway, Robin
  • Sato, Motohiro

Abstract

Market failure in the financing of risky projects is studied. Project risk includes idiosyncratic and aggregate components. Banks can investigate aggregate risk and can evaluate the idiosyncratic risk of each entrepreneur. They engage in Bertrand competition for entrepreneurs using interest rates. Information obtained by a bank on aggregate risk is fully revealed, and that on entrepreneur-specific risk is partly revealed. Banks will not investigate aggregate risk and will evaluate entrepreneurs too intensively. Efficiency can be improved by public acquisition of information on industry risk and by loan guarantees partially covering losses on projects that fail. Copyright 1999 by Blackwell Publishing Inc.

Suggested Citation

  • Boadway, Robin & Sato, Motohiro, 1999. " Information Acquisition and Government Intervention in Credit Markets," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 1(3), pages 283-308.
  • Handle: RePEc:bla:jpbect:v:1:y:1999:i:3:p:283-308
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    Cited by:

    1. Robin Boadway & Jean-François Tremblay, 2003. "Public Economics and Startup Entrepreneurs," CESifo Working Paper Series 877, CESifo Group Munich.
    2. Robin Boadway & Motohiro Sato, 2011. "Entrepreneurship and asymmetric information in input markets," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(2), pages 166-192, April.
    3. Jörn Hendrich Block & Thorsten Staak & Philipp Tilleßen, 2007. "Ist das staatliche Eingreifen ins Gründungsgeschehen theoretisch legitimiert?," FEMM Working Papers 07007, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    4. 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.
    5. 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.

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