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Genesis of market failure of adverse-selection-type in problem of effective capital allocation

  • Sokolovska, Olena
  • Sokolovskyi, Dmytro

The paper investigates the problem of possibility of investment allocation by economies according to adverse pattern, which can ultimately imply the rise of situation of market failure. We consider the transformation of “ideal” capital allocation into allocation of adverse-selection-type, which occurs as a result of migration of agents of different types. We conclude that the uncontrolled agents’ behavior, due to their bounded rationality, can lead to adverse selection state, when the less effective agents are investors in economies with most favorable investment climate, and vice versa.

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File URL: http://mpra.ub.uni-muenchen.de/41868/1/MPRA_paper_41868.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 41868.

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Date of creation: 2012
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Handle: RePEc:pra:mprapa:41868
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  1. Jean Tirole, 2012. "Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning," American Economic Review, American Economic Association, vol. 102(1), pages 29-59, February.
  2. Huberman, Gur & Kandel, Shmuel, 1993. "On the incentives for money managers : A signalling approach," European Economic Review, Elsevier, vol. 37(5), pages 1065-1081, June.
  3. Stiglitz, Joseph E, 1989. "Markets, Market Failures, and Development," American Economic Review, American Economic Association, vol. 79(2), pages 197-203, May.
  4. Alberto Martin, 2009. "A model of collateral, investment and adverse selection," Economics Working Papers 1136, Department of Economics and Business, Universitat Pompeu Fabra.
  5. Philippon, Thomas & Skreta, Vasiliki, 2010. "Optimal Interventions in Markets with Adverse Selection," CEPR Discussion Papers 7737, C.E.P.R. Discussion Papers.
  6. 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.
  7. 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.
  8. Heinkel, Robert & Stoughton, Neal M, 1994. "The Dynamics of Portfolio Management Contracts," Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 351-87.
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