Asymmetric information, option to wait to invest and the optimal level of investment
This paper analyzes equilibrium rationing on credit markets in the case of gains from waiting to acquire information about the future profitability of investment. We compare the competitive outcome with the socially optimal level of investment. We show that the opportunity to postpone investment changes the nature of the inefficiencies of the competitive outcome fundamentally. Without the option to wait, high risk firms tend to invest and the outcome is characterized by a situation of underinvestment. If firms can wait high risk firms benefit the most from waiting. In this case low risk firms tend to invest immediately and a situation of overinvestment will result, since from the banks' point of view firms do not delay enough.
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- Gale, William G., 1990.
"Federal lending and the market for credit,"
Journal of Public Economics,
Elsevier, vol. 42(2), pages 177-193, July.
- Gale, William G, 1991.
"Economic Effects of Federal Credit Programs,"
American Economic Review,
American Economic Association, vol. 81(1), pages 133-52, March.
- Williamson, Stephen D, 1988. "Liquidity, Banking, and Bank Failures," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(1), pages 25-43, February.
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