The equilibrium allocation of investment capital in the presence of adverse selection and costly state verification
type: Item
instance of: scholarly article
title: The equilibrium allocation of investment capital in the presence of adverse selection and costly state verification
zbMATH Open document ID: 0820.90002
DOI: 10.1007/BF01209695
author: John H. Boyd
author: Bruce D. Smith
published in: Economic Theory
publication date: 1995-01-05T00:00:00Z
review text: This paper describes the equilibrium allocation of investment capital in an environment with the following features: investment must be financed externally; investment opportunities are heterogeneous, differing in their probability distributions of returns; owners of investment projects are privately informed about the return distributions; and actual returns on any project can be observed by agents other than the owner only at some costs. Thus the market allocation of investment funds in the presence of adverse selection and costly state verification is considered. Of particular interest in the environment is who obtaines funds (or conversely, who might experience credit rationing) and what contractual terms emerge in equilibrium. A general equilibrium is defined under the assumption that the supply of funds is at least potentially adequate to meet demand. Conditions necessary for the existence of such an equilibrium and some comparative results are given. Further, the case where the supply of funds is inadequate to meet demand is considered, and how this would effect various results.
Mathematics Subject Classification ID: 91B28
Mathematics Subject Classification ID: 91B50
zbMATH DE Number: 707310
zbMATH Keywords: credit rationing
zbMATH Keywords: equilibrium allocation of investment capital
reviewed by: Klaus Ehemann
MaRDI profile type: Publication
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full work available at URL: https://doi.org/10.1007/bf01209695
OpenAlex ID: W2017184967
description: scientific article; zbMATH DE number 707310