Favoritism or Markets in Capital Allocation?
Casual observation suggests that capital allocation is often driven by favoritism and connections rather than by market mechanisms and information on future expected returns. We investigate when favoritism or markets emerge as an equilibrium outcome in the allocation of capital. We show that when information is unreliable and costly,financiers do not have incentives to investigate distant investment opportunities and allocate capital to entrepreneurs they are familiar with (favoritism). If the pool of saving is relatively small,favoritism can lead to an e?cient allocation of investment. As the economy develops and its pool of saving increases,information production and the identification of distant investment opportunities (markets) become crucial for e?cient investment decisions. Nevertheless,favoritism may emerge in equilibrium and investors may find it optimal to fund low-quality entrepreneurs if they are familiar with them. Since competition for capital is lower in an equilibrium with favoritism,entrepreneurs can enjoy high rents. Thus,even high quality entrepreneurs may have no incentive to join markets with standards that foster information acquisition,but rather prefer to run inefficiently small firms.
Finance and growth Information production Competition for capital Investment eFFciency.
Mariassunta Giannetti Xiaoyun Yu
Stockholm School of Economics,CEPR and ECGI Kelley School of Business Indiana University
国际会议
成都
英文
2007-07-09（万方平台首次上网日期，不代表论文的发表时间）