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Capital Flows with Debt- and Equity-Financed Investment-Equilibrium Structure and Efficiency Implications

  • Assaf Razin
  • Chi-Wa Yuen
  • Efraim Sadka

This paper distinguishes between debt and equity flows in the presence of information asymmetry between the firm’s “insiders” and “outsiders” in a small open economy. It shows the inadequacy of capital investment because its scope is too narrow and the investment each firm makes is too little. An unconventional policy tool is proposed to correct the market failure: lump-sum subsidies to firms that choose to equity-finance their investments.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 98/159.

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Length: 21
Date of creation: 01 Nov 1998
Date of revision:
Handle: RePEc:imf:imfwpa:98/159
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  1. Razin, A. & Sadka, E. & Yuen, C.-W., 1998. "Channelling Domestic Savings into Productive Investment Under Asymmetric Information: The Essential Role of Foreign Direct Investment," Papers 01-98, Tel Aviv.
  2. Tesar, Linda L & Werner, Ingrid M, 1995. "U.S. Equity Investment in Emerging Stock Markets," World Bank Economic Review, World Bank Group, vol. 9(1), pages 109-29, January.
  3. Roger H. Gordon & A. Lans Bovenberg, 1994. "Why is Capital so Immobile Internationally?: Possible Explanations and Implications for Capital Income Taxation," NBER Working Papers 4796, National Bureau of Economic Research, Inc.
  4. Lane, Philip R, 1999. "North-South Lending with Moral Hazard and Repudiation Risk," Review of International Economics, Wiley Blackwell, vol. 7(1), pages 50-58, February.
  5. Jonathan Eaton & Mark Gersovitz, 1987. "Country Risk and the Organization of International Capital Transfer," NBER Working Papers 2204, National Bureau of Economic Research, Inc.
  6. Zhaohui Chen & Mohsin S. Khan, 1997. "Patterns of Capital Flows to Emerging Markets: A Theoretical Perspective," IMF Working Papers 97/13, International Monetary Fund.
  7. Gertler, Mark & Rogoff, Kenneth, 1990. "North-South lending and endogenous domestic capital market inefficiencies," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 245-266, October.
  8. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  9. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  10. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  11. Bovenberg, A.L. & Gordon, R.H., 1996. "Why is capital so immobile internationally? Possible explanation and implications for capital income taxation," Other publications TiSEM 6a131c21-fd9a-4d83-8d9a-7, Tilburg University, School of Economics and Management.
  12. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  13. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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