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Project risk neutrality in the context of asymmetric information

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  • Fabian Alex

Abstract

Using the modelling framework of Stiglitz & Weiss (1981), we show that perhaps surprisingly there is no influence of projects’ riskiness on the capital market equilibrium. The savings interest rate fully determines the amount of credit rationing and the nature of an equilibrium (adverse selection, two-prices etc.). This rate is, in turn, fully determined by the relative probabilities of success of firms’ projects (and, thus, repayment of their debt). Hence, making capital markets overall less risky, which may for example be the case when financial markets become greener, does not alle- viate concerns of asymmetric information. The result holds both for cases of hidden information and for those of hidden actions.

Suggested Citation

  • Fabian Alex, 2024. "Project risk neutrality in the context of asymmetric information," Working Papers 235, Bavarian Graduate Program in Economics (BGPE).
    • Handle: RePEc:bav:wpaper:235_fabian_alex
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    File URL: https://www.bgpe.de/files/2024/05/235_Alex_WP.pdf
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    References listed on IDEAS

    as
    1. Stiglitz, Joseph E & Weiss, Andrew, 1992. "Asymmetric Information in Credit Markets and Its Implications for Macro-economics," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 694-724, October.
    2. Xudong An & Gary Pivo, 2020. "Green Buildings in Commercial Mortgage‐Backed Securities: The Effects of LEED and Energy Star Certification on Default Risk and Loan Terms," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 48(1), pages 7-42, March.
    3. Xunhua Su & Li Zhang, 2017. "A Reexamination of Credit Rationing in the Stiglitz and Weiss Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(5), pages 1059-1072, August.
    4. Lutz G. Arnold & Johannes Reeder & Stefanie Trepl, 2014. "Single-name Credit Risk, Portfolio Risk and Credit Rationing," Economica, London School of Economics and Political Science, vol. 81(322), pages 311-328, April.
    5. Wette, Hildegard C, 1983. "Collateral in Credit Rationing in Markets with Imperfect Information: Note," American Economic Review, American Economic Association, vol. 73(3), pages 442-445, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Asymmetric Information; Financial Markets; Green Loans; Hidden Information; Hidden Action; Project Risk;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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