Financing and Taxing New Firms under Asymmetric Information
This paper uses a sequence of models to study the efficiency of credit-market equilibria, and the scope for welfare-improving policy interventions, when financial intermediaries cannot observe the riskiness or returns of potential investment projects by new firms. It is first shown that when only loan financing is available there is a systematic tendency towards overinvestment in high-return, high-risk projects and underinvestment in low-return, low-risk projectsrelative to the social optimum [this encompasses the well-known results of Stiglitz and Weiss (1981) and de Meza and Webb (1987) as special cases]. The ambiguity is mitigated, however, if firms have access to equity financing: there is then (under reasonable conditions) unambiguously overinvestment. Policy implications are developed, and the results extended to allow for screening and signaling equilibria.
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Volume (Year): 62 (2006)
Issue (Month): 4 (December)
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References listed on IDEAS
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.:
- B. Douglas Bernheim, 1999.
"Taxation and Saving,"
NBER Working Papers
7061, National Bureau of Economic Research, Inc.
- Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
- 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.
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