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Financial Matching, Asymmetric Information and Entrepreneurial Risk Taking

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  • Timo Vesala

Abstract

We study financial matching in credit markets when entrepreneurs have private information about their success potential. Entrepreneurs can search for financing for either a "risky" or a "safe" investment and only the risky project is sensitive to entrepreneurs' intrinsic "types". There is excess risk taking in the sense that entrepreneurs with inefficiently low success probabilities choose the risky investment. However, steady states featuring greater market liquidity are associated with higher efficiency. As market liquidity also reflects the intensity of competition among financiers, earlier results which indicate a negative relationship between competition and allocative efficiency do not hold in our setup. Copyright The editors of the "Scandinavian Journal of Economics" 2007 .

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  • Timo Vesala, 2007. "Financial Matching, Asymmetric Information and Entrepreneurial Risk Taking," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(3), pages 469-485, September.
  • Handle: RePEc:bla:scandj:v:109:y:2007:i:3:p:469-485
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    1. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, January.
    2. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, number 9780521576475.
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    Cited by:

    1. Danilo Liberati, 2014. "An estimated DSGE model with search and matching frictions in the credit market," Temi di discussione (Economic working papers) 986, Bank of Italy, Economic Research and International Relations Area.

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