de Meza, David and Webb, David C. (1989) The role of interest rate taxes in credit markets with divisible projects and asymmetric information. Journal of Public Economics, 39 (1). pp. 33-44. ISSN 0047-2727
Abstract
This paper assumes that entrepreneurs have divisible projects with random payoffs. However, managerial skill is unobservable to outsiders. Projects are assumed to be financed through debt. A pooling equilibrium is shown to exist in which good and bad entrepreneurs sell debt at the same price. If both types of entrepreneur have a positive probability of bankruptcy, project scale will be too large. This provides a prima facie case for raising interest rates and hence the cost of capital through taxation. If in equilibrium only the poor entrepreneurs go bankrupt, there is an outlying possibility that interest rates are too low and a subsidy is called for.
| Item Type: | Article |
|---|---|
| Official URL: | http://www.elsevier.com/wps/find/journaldescriptio... |
| Additional Information: | © 1989 Elsevier |
| Library of Congress subject classification: | H Social Sciences > HB Economic Theory H Social Sciences > HJ Public Finance |
| Sets: | Research centres and groups > Managerial Economics and Strategy Group Departments > Finance Departments > Management Research centres and groups > Financial Markets Group (FMG) Collections > Economists Online |
| Date Deposited: | 06 May 2011 11:11 |
| URL: | http://eprints.lse.ac.uk/35628/ |
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