Financing of Investment in Eastern Europe: A Theoretical Perspective

Bengt Holmstrom

No 294837, Institute for Policy Reform Working Paper Series from Institute for Policy Reform

Abstract: The paper looks at the role of collateral and intermediation in financing investments. Three variations of a simple information economic model are developed to shed light on the relative roles of these two basic solutions to the information problems attending investmenCi The main model shows that investments will be financed both with information intensive monitoring capital (intermediation) and with uninformed capital (e.g. bank finance). The degree of intermediation is a function of the level of collaterizable assets that a firm has. Less well capitalized firms must utilize more costly, information intensive finance. The paper applies the analysis to describe the likely forms of financing in Eastern Europe and the natural course of investments.

Keywords: Financial Economics; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 59
Date: 1993-12
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Persistent link: https://EconPapers.repec.org/RePEc:ags:iprwps:294837

DOI: 10.22004/ag.econ.294837

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