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Adverse selection and security design

  • Rohit Rahi

This paper studies the problem of optimal security design by a privately informed entrepreneur. In the context of a simple parametric model, it is shown that the entrepreneur does not find it profitable to float an asset that affords her an informational advantage. The reason is that, with rational, uninformed outside investors, the entrepreneur faces adverse selection in the security market, which prevents her from exploiting her position as an insider. This is true whether or not she has market power in trading the asset. Copyright 1996 by The Review of Economic Studies Limited.

(This abstract was borrowed from another version of this item.)

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File URL: http://www.econ.upf.edu/docs/papers/downloads/64.pdf
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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 64.

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Date of creation: Jul 1993
Date of revision: Feb 1994
Handle: RePEc:upf:upfgen:64
Contact details of provider: Web page: http://www.econ.upf.edu/

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  1. Gali Jordi, 1994. "Local Externalities, Convex Adjustment Costs, and Sunspot Equilibria," Journal of Economic Theory, Elsevier, vol. 64(1), pages 242-252, October.
  2. Dimitri Vayanos & Diego Rodríguez, 1993. "Decentralization and the management of competition," Economics Working Papers 47, Department of Economics and Business, Universitat Pompeu Fabra.
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