Adverse Selection and Risk Aversion in Capital Markets
We generalize Boadway and Keen's model of adverse selection in capital markets to allow for risk aversion on the part of entrepreneurs. We use the new model to analyze two types of policies. We first consider policies that would allow entrepreneurs to use a greater fraction of their total wealth in financing their projects, thus allowing them to reduce reliance on debt or equity finance by outside investors. We show that such policies may not be welfare-improving, because they expose entrepreneurs to more downside risk. This result highlights the importance of allowing for risk aversion, since policies that aim at alleviating inefficiencies associated with adverse selection may increase risk exposure and ultimately reduce welfare. We then consider how the tax treatment of losses affects social welfare. We show that if a society places a high value on distributional equity or if entrepreneurs are sufficiently risk-averse, a full-loss-offset system may be desirable even when there is excessive investment.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 67 (2011)
Issue (Month): 4 (December)
|Contact details of provider:|| Web page: https://www.mohr.de/fa|
|Order Information:|| Postal: Mohr Siebeck GmbH & Co. KG, P.O.Box 2040, 72010 Tübingen, Germany|
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.:
- David de Meza & David C. Webb, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 281-292.
- Fuest, Clemens & Tillessen, Philipp, 2005. "Why do governments use closed ended subsidies to support entrepreneurial investment?," Economics Letters, Elsevier, vol. 89(1), pages 24-30, October.
- Esteban Jaimovich, 2010.
"Adverse Selection and Entrepreneurship in a Model of Development,"
Scandinavian Journal of Economics,
Wiley Blackwell, vol. 112(1), pages 77-100, 03.
- Esteban Jaimovich, 2008. "Adverse Selection and Entrepreneurship in a Model of Development," Carlo Alberto Notebooks 78, Collegio Carlo Alberto.
- 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.
- R. Glenn Hubbard & William M. Gentry, 2000. "Tax Policy and Entrepreneurial Entry," American Economic Review, American Economic Association, vol. 90(2), pages 283-287, May.
- 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.
- Galina Vereshchagina & Hugo A. Hopenhayn, 2009. "Risk Taking by Entrepreneurs," American Economic Review, American Economic Association, vol. 99(5), pages 1808-1830, December.
- Hugo A. Hopenhayn & Galina Vereshchagina, 2003. "Risk Taking by Entrepreneurs," RCER Working Papers 500, University of Rochester - Center for Economic Research (RCER).
- Evsey D. Domar & Richard A. Musgrave, 1944. "Proportional Income Taxation and Risk-Taking," The Quarterly Journal of Economics, Oxford University Press, vol. 58(3), pages 388-422. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:mhr:finarc:urn:sici:0015-2218(291112)67:4_303:asarai_2.0.tx_2-h. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Wolpert)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.