Too much investment: a problem of asymmetric information

de Meza, David ORCID: 0000-0002-5638-8310 and Webb, David C. ORCID: 0009-0005-5611-7253 (1987) Too much investment: a problem of asymmetric information. Quarterly Journal of Economics, 102 (2). pp. 281-292. ISSN 0033-5533

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Abstract

This paper shows that under plausible assumptions, the inability of lenders to discover all of the relevant characteristics of borrowers results in investment in excess of the socially efficient level. Raising the rate of interest above the free market level will restore optimality. This conflicts with generally held views and is contrasted with the Stiglitz-Weiss model. It is shown that the assumptions which yield overinvestment support debt as the equilibrium method of finance. However, under the Stiglitz-Weiss assumptions, used to derive an underinvestment result, equity is shown to be the equilibrium method of finance.

Item Type:	Article
Official URL:	http://qje.oxfordjournals.org/
Additional Information:	© 1987 the President and Fellows of Harvard College and the Massachusetts Institute of Technology
Divisions:	Management
Subjects:	H Social Sciences > HB Economic Theory
Date Deposited:	06 May 2011 10:51
Last Modified:	01 Nov 2024 05:11
URI:	http://eprints.lse.ac.uk/id/eprint/35599

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