Connections and Information Acquisition in Capital Allocation
Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
Indiana University Bloomington - Department of Finance; China Academy of Financial Research (CAFR)
July 27, 2012
AFA 2009 San Francisco Meetings Paper
ECGI - Finance Working Paper No. 153/2007
We investigate to what extent, depending on the level of initial capital, financiers allocate capital on the basis of prior connections, instead of collecting information on the productivity of a potential entrepreneur. We explore the effects of information acquisition (or the lack thereof) on investment efficiency, financiers' returns and entrepreneurial rents and show that there may be either under-investment or over-investment in information acquisition. Our results have implications for the desirability of informal finance and connected lending.
Number of Pages in PDF File: 44
Keywords: Finance and growth, Information acquisition, Competition for capital, Connection-based vs.arm's length financial systems
JEL Classification: G3, O16working papers series
Date posted: March 17, 2008 ; Last revised: July 27, 2012
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