Adverse Selection and Risk Aversion in Capital Markets
We generalize the Boadway and Keen (2006) model of adverse selection in a capital market to allow for risk aversion on the part of entrepreneurs. We show that the Boadway and Keen conclusion-that adverse selection leads to excessive investment-does not necessarily hold when entrepreneurs are risk averse. We use their framework, with the additional assumption of risk aversion, to analyze the effect of policies that would reduce entrepreneurs' reliance on debt or equity financing by outside investors. We show that such policies, by exposing entrepreneurs to more down-side risk, may reduce the level of investment in risky projects, increase inequality and potentially reduce social welfare.
|Date of creation:||16 Mar 2009|
|Date of revision:||24 Mar 2009|
|Contact details of provider:|| Postal: |
Phone: (780) 492-3406
Fax: (780) 492-3300
Web page: http://www.economics.ualberta.ca/
More information through EDIRC
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.:
- de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 281-92, May.
- 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.
- 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.
- Galina Vereshchagina & Hugo A. Hopenhayn, 2009.
"Risk Taking by Entrepreneurs,"
American Economic Review,
American Economic Association, vol. 99(5), pages 1808-30, December.
- 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.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:ris:albaec:2009_015. 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: (Brenda Carrier)
If references are entirely missing, you can add them using this form.