Financial institutions and the allocation of talent

Vesa Kanniainen and Mikko Leppämäki

No 5/2002, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: The paper shows that uninformed finance gives rise to excessive entry, both in human-capital-intensive and in conventional industries when the financial institutions cannot identify the entrepreneurial talent.Introduction of informed capital (eg venture capital finance) with superior screening ability results in an institutional equilibrium with efficiency gains in human-capital industries.Contrary to received wisdom, the institutional equilibrium with informed capital is characterised by more limited entry to an industry, which requires highly talented human capital. Unexpectedly, the total welfare effect is ambiguous, as the allocation of non-informed capital is now less efficient in the conventional industry.The institutional equilibrium is shaped by investors' risk preferences, costs of establishing uninformed and informed capital, and the initial distribution ot talent in the economy.

Keywords: allocation of talent; asymmetric information; financial institutions; venture capital; institutional equilibrium (search for similar items in EconPapers)
JEL-codes: D82 G24 (search for similar items in EconPapers)
Date: 2002
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