Abstract
In the presence of asymmetric information, the stage at which financing decisions are made about investment projects in a small open economy is crucial for the composition of international capital inflows as well as for the efficiency of channeling savings into investment. This paper compares the implications of two extreme cases regarding the information possessed by the firms at their financing stage for whether inflows of foreign debt may crowd out foreign equity or the other way round. The scope for corrective tax policies is examined. We also provide a welfare comparison between the two mechanisms of capital flows.
| Original language | English |
|---|---|
| Pages (from-to) | 33-47 |
| Number of pages | 15 |
| Journal | Annals of Economics and Finance |
| Volume | 1 |
| Issue number | 1 |
| State | Published - May 2000 |
Keywords
- Asymmetric information
- Bankruptcy cost
- Corrective taxation
- Debt and equity flows
- Market failures