Financing New Investments under Asymmetric Information: a General Approach

Robin Boadway () and Michael Keen ()

Cahiers de recherche from CIRPEE

Abstract: We study the efficiency of credit market equilibria when financial intermediaries cannot observe the riskiness or the returns of potential investment projects. With loan financing, there is over-instrument in high-return, high-risk projects and under-investment in low-return, low-risk projects relative to the social optimum. If firms have the choice of equity finance, there is unambiguously over-investment under reasonable conditions. The well-known cases of Stiglitz and Weiss and of de Meza and Webb emerge as special cases. Policy implications are considered, and the results are extended to allow for signaling and screening equilibria.

Keywords: Credit Markets; Asymmetric Information (search for similar items in EconPapers)
JEL-codes: G14 G18 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-com and nep-ent
Date: 2004
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Working Paper: Financing New Investments under Asymmetric Information: A General Approach (2004)
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Persistent link: http://EconPapers.repec.org/RePEc:lvl:lacicr:0407

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