Project risk neutrality in the context of asymmetric information

Fabian Alex

No 235, Working Papers from Bavarian Graduate Program in Economics (BGPE)

Abstract: Using the modelling framework of Stiglitz & Weiss (1981), we show that perhaps surprisingly there is no influence of projects’ riskiness on the capital market equilibrium. The savings interest rate fully determines the amount of credit rationing and the nature of an equilibrium (adverse selection, two-prices etc.). This rate is, in turn, fully determined by the relative probabilities of success of firms’ projects (and, thus, repayment of their debt). Hence, making capital markets overall less risky, which may for example be the case when financial markets become greener, does not alle- viate concerns of asymmetric information. The result holds both for cases of hidden information and for those of hidden actions.

Keywords: Asymmetric Information; Financial Markets; Green Loans; Hidden Information; Hidden Action; Project Risk (search for similar items in EconPapers)
JEL-codes: D82 G14 G21 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2024-05
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-cta and nep-ppm
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Persistent link: https://EconPapers.repec.org/RePEc:bav:wpaper:235_fabian_alex

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