Adverse selection and security design
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.
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References listed on IDEAS
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- Gali Jordi, 1994.
"Local Externalities, Convex Adjustment Costs, and Sunspot Equilibria,"
Journal of Economic Theory,
Elsevier, vol. 64(1), pages 242-252, October.
- Gali, J., 1992. "Local Externalities, Convex Adjustment Costs and Sunspot Equilibria," Papers 92-07, Columbia - Graduate School of Business.
- Jordi Galí, 1993. "Local externalities, convex adjustment costs and sunspot equilibria," Economics Working Papers 43, Department of Economics and Business, Universitat Pompeu Fabra.
- Dimitri Vayanos & Diego Rodríguez, 1993. "Decentralization and the management of competition," Economics Working Papers 47, Department of Economics and Business, Universitat Pompeu Fabra.
- Oriol Amat, 1993. "The relationship between tax regulations and financial accounting: A comparison of Germany, Spain and the United Kingdom," Economics Working Papers 46, Department of Economics and Business, Universitat Pompeu Fabra. Full references (including those not matched with items on IDEAS)