Financing New Investments Under Asymmetric Information: A General Approach

Robin Boadway and Michael Keen

No 1017, Working Paper from Economics Department, Queen's University

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-investment 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. The results are extended to allow for signaling and screening equilibria.

Keywords: Asymmetric Information; Credit Markets (search for similar items in EconPapers)
JEL-codes: G14 G18 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2004-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1017.pdf First version 2004 (application/pdf)

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Working Paper: Financing New Investments under Asymmetric Information: a General Approach (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:1017

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