Asymmetric Information, Entrepreneurial Activity, and the Scope of Fiscal Policy in an Open Regional Economy

RIT Economics Department Working Paper No. 10-03

25 Pages Posted: 4 May 2010

See all articles by Amitrajeet A. Batabyal

Amitrajeet A. Batabyal

Rochester Institute of Technology

Peter Nijkamp

VU University of Amsterdam - Department of Spatial Economics; Tinbergen Institute

Multiple version iconThere are 2 versions of this paper

Date Written: May 3, 2010

Abstract

We analyze two hitherto little studied but salient questions concerning the trinity of asymmetric information, entrepreneurial activity, and the scope of fiscal policy in an open regional economy. First, we use a two period model to analyze the contractual relationship between entrepreneurs and venture capitalists when the latter are located outside the region. Because there is moral hazard, venture capitalists do not offer entrepreneurs the first best investment contract and entrepreneurial activity is suboptimal. Second, we analyze a two period model with venture capitalists who are now located inside our regional economy. We show that despite the existence of a credit market imperfection, because, inter alia, the regional authority (RA) does not have an informational advantage over the private sector, it is not possible for this RA to use fiscal policy to make a Pareto improving intervention in which some agents are better off and others are no worse.

Keywords: Asymmetric Information, Contract, Entrepreneur, Venture Capitalist, Uncertainty

JEL Classification: R11, D82, H11

Suggested Citation

Batabyal, Amitrajeet A. and Nijkamp, Peter, Asymmetric Information, Entrepreneurial Activity, and the Scope of Fiscal Policy in an Open Regional Economy (May 3, 2010). RIT Economics Department Working Paper No. 10-03, Available at SSRN: https://ssrn.com/abstract=1599696 or http://dx.doi.org/10.2139/ssrn.1599696

Amitrajeet A. Batabyal (Contact Author)

Rochester Institute of Technology ( email )

Department of Economics, RIT
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HOME PAGE: http://people.rit.edu/aabgsh

Peter Nijkamp

VU University of Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
1081HV Amsterdam
Netherlands
+31 20 4446091 (Phone)
+31 20 4445611 (Fax)

Tinbergen Institute

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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