IDEAS home Printed from https://ideas.repec.org/a/spr/epolin/v45y2018i4d10.1007_s40812-018-0099-8.html
   My bibliography  Save this article

Outside (option) in the orchard: lemons or peaches?

Author

Listed:
  • Christian Pietro

    (University of Naples Parthenope and CELPE)

  • Marco Maria Sorge

    (University of Salerno, University of Göttingen and CSEF)

Abstract

We study how an employment-related outside option affects equilibrium properties of credit markets plagued with asymmetric information, when returns to entrepreneurial ventures are ranked by first-order stochastic dominance. While greater separation of expected payoffs in paid employment than in entrepreneurship may involve credit rationing or market breakdown, a lemons problem in the outside option may produce multiple competitive equilibria, each featuring favorable selection in the credit market. Under these circumstances, informational asymmetries will not prevent high-ability individuals from pursuing entrepreneurship and yet induce more investment than is socially efficient. This prediction is consistent with recent empirical evidence on the relative importance of rationing vis-à-vis over-provision for credit seeking, informationally opaque firms.

Suggested Citation

  • Christian Pietro & Marco Maria Sorge, 2018. "Outside (option) in the orchard: lemons or peaches?," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 45(4), pages 555-564, December.
    • Handle: RePEc:spr:epolin:v:45:y:2018:i:4:d:10.1007_s40812-018-0099-8
    DOI: 10.1007/s40812-018-0099-8
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s40812-018-0099-8
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s40812-018-0099-8?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. de Meza, David & Webb, David, 1999. "Wealth, Enterprise and Credit Policy," Economic Journal, Royal Economic Society, vol. 109(455), pages 153-163, April.
    2. Eduardo M. Azevedo & Daniel Gottlieb, 2017. "Perfect Competition in Markets With Adverse Selection," Econometrica, Econometric Society, vol. 85, pages 67-105, January.
    3. Brian Hillier & M.V. Ibrahimo, 1992. "The Performance of Credit Markets under Asymmetric Information about Project Means and Variances," Journal of Economic Studies, Emerald Group Publishing, vol. 19(3), pages 3-17, September.
    4. Jean Bonnet & Sylvie Cieply & Marcus Dejardin, 2016. "Credit rationing or overlending? An exploration into financing imperfection," Applied Economics, Taylor & Francis Journals, vol. 48(57), pages 5563-5580, December.
    5. Simon C. Parker, 2003. "Asymmetric information, occupational choice and government policy," Economic Journal, Royal Economic Society, vol. 113(490), pages 861-882, October.
    6. Black, Jane & de Meza, David, 1994. "The nature of credit-market failure," Economics Letters, Elsevier, vol. 46(3), pages 243-249, November.
    7. David de Meza & David C. Webb, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 281-292.
    8. repec:bla:econom:v:60:y:1993:i:237:p:27-40 is not listed on IDEAS
    9. N. Gregory Mankiw, 1986. "The Allocation of Credit and Financial Collapse," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(3), pages 455-470.
    10. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    11. Dwight M. Jaffee & Thomas Russell, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 651-666.
    12. Ghatak, Maitreesh & Morelli, Massimo & Sjostrom, Tomas, 2007. "Entrepreneurial talent, occupational choice, and trickle up policies," Journal of Economic Theory, Elsevier, vol. 137(1), pages 27-48, November.
    13. Wilson, Charles A, 1979. "Equilibrium and Adverse Selection," American Economic Review, American Economic Association, vol. 69(2), pages 313-317, May.
    14. Parker,Simon C., 2006. "The Economics of Self-Employment and Entrepreneurship," Cambridge Books, Cambridge University Press, number 9780521030632, January.
    15. de Meza, David & Webb, David, 1990. "Risk, Adverse Selection and Capital Market Failure," Economic Journal, Royal Economic Society, vol. 100(399), pages 206-214, March.
    16. de Meza, David & Webb, David, 2000. "Does credit rationing imply insufficient lending?," Journal of Public Economics, Elsevier, vol. 78(3), pages 215-234, November.
    17. Colin Rose, 1993. "Equilibrium and Adverse Selection," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 559-569, Winter.
    18. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    19. Charles Wilson, 1980. "The Nature of Equilibrium in Markets with Adverse Selection," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 108-130, Spring.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:bla:scotjp:v:49:y:2002:i:2:p:162-95 is not listed on IDEAS
    2. Inci, Eren, 2013. "Occupational choice and the quality of entrepreneurs," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 1-21.
    3. Giuseppe Coco & Giuseppe Pignataro, 2013. "Unfair credit allocations," Small Business Economics, Springer, vol. 41(1), pages 241-251, June.
    4. Marcello D'Amato & Christian Di Pietro & Marco M. Sorge, 2019. "Serving the (Un)Deserving? The Allocation of Credit in Markets with Asymmetrically Informed Lenders," CSEF Working Papers 539, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    5. Wim Naudé, 2008. "Entrepreneurship in Economic Development," WIDER Working Paper Series RP2008-20, World Institute for Development Economic Research (UNU-WIDER).
    6. de Meza, David & Reito, Francesco, 2019. "Too Little Lending: A Problem of Symmetric Information," MPRA Paper 93700, University Library of Munich, Germany.
    7. Neyer, Ulrike, 2004. "Asymmetric information in credit markets--implications for the transition in Eastern Germany," Economic Systems, Elsevier, vol. 28(1), pages 61-78, March.
    8. Mark Gertler, 1988. "Financial structure and aggregate economic activity: an overview," Proceedings, Federal Reserve Bank of Cleveland, pages 559-596.
    9. Anginer, Deniz & de la Torre, Augusto & Ize, Alain, 2011. "Risk absorption by the state: when is it good public policy ?," Policy Research Working Paper Series 5893, The World Bank.
    10. Ibrahimo, M.V. & Barros, C.P., 2009. "Relevance or irrelevance of capital structure?," Economic Modelling, Elsevier, vol. 26(2), pages 473-479, March.
    11. Anastasios Dosis, 2019. "Interest Rates and Investment Under Competitive Screening and Moral Hazard," Working Papers hal-02130434, HAL.
    12. Markus K. Brunnermeier & Thomas M. Eisenbach & Yuliy Sannikov, 2012. "Macroeconomics with Financial Frictions: A Survey," Levine's Working Paper Archive 786969000000000384, David K. Levine.
    13. Giuseppe Coco & Giuseppe Pignataro, 2010. "Inequality of Opportunity in the Credit Market," SERIES 0026, Dipartimento di Economia e Finanza - Università degli Studi di Bari "Aldo Moro", revised Jan 2010.
    14. Paola Montero Ledezma, 2018. "The Role of Politics in Crisis in Financial Markets," Investigación & Desarrollo, Universidad Privada Boliviana, vol. 18(1), pages 5-21.
    15. Sharma, Priyanka, 2017. "Is more information always better? A case in credit markets," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 269-283.
    16. G. Coco & G. Pignataro, 2012. "Wealth inequality, unequal opportunities and inefficient credit market," Working Papers wp851, Dipartimento Scienze Economiche, Universita' di Bologna.
    17. Coco, Giuseppe & Pignataro, Giuseppe, 2014. "The poor are twice cursed: Wealth inequality and inefficient credit market," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 149-159.
    18. Anginer, Deniz & de la Torre, Augusto & Ize, Alain, 2014. "Risk-bearing by the state: When is it good public policy?," Journal of Financial Stability, Elsevier, vol. 10(C), pages 76-86.
    19. Daniel McFadden & Carlos Noton & Pau Olivella, "undated". "Remedies for Sick Insurance," Working Papers 620, Barcelona School of Economics.
    20. Robert E. Carpenter & Bruce C. Petersen, 2002. "Capital Market Imperfections, High-Tech Investment, and New Equity Financing," Economic Journal, Royal Economic Society, vol. 112(477), pages 54-72, February.
    21. Francesco Cohen & Alessandro Fedele & Paolo M. Panteghini, 2016. "Corporate taxation and financial strategies under asymmetric information," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 33(1), pages 9-34, April.

    More about this item

    Keywords

    Occupational choice; Entrepreneurship; Credit markets; Asymmetric information;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G2 - Financial Economics - - Financial Institutions and Services

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:epolin:v:45:y:2018:i:4:d:10.1007_s40812-018-0099-8. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.