A Model of Collateral, Investment, and Adverse Selection

• Autores: Alberto Martin
• Localización: Working Papers ( Universitat Pompeu Fabra. Departamento de Economía y Empresa ), Nº. 1136, 2008
• Idioma: inglés
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• Resumen

  • This paper characterizes the relationship between entrepreneurial wealth and aggregate investment under adverse selection. Its main finding is that such a relationship need not be monotonic. In particular, three results emerge from the analysis: (i) pooling equilibria, in which investment is independent of entrepreneurial wealth, are more likely to arise when entrepreneurial wealth is relatively low; (ii) separating equilibria, in which investment is increasing in entrepreneurial wealth, are most likely to arise when entrepreneurial wealth is relatively high and; (iii) for a given interest rate, an increase in entrepreneurial wealth may generate a discontinuous fall in investment.