Signalling, Productivity and Investment

35 Pages Posted: 2 Sep 2016 Last revised: 23 Jun 2018

See all articles by Anastasios Dosis

Anastasios Dosis

ESSEC Business School; University of Cergy-Pontoise - THEMA

Date Written: June 17, 2018


This paper studies the effect of inter-entrepreneurial productivity variation on investment under asymmetric information and signalling in the credit market. When productivity is not sufficiently dispersed, safe-type entrepreneurs face borrowing constraints and might under- or over-invest relative to the social optimum. Reversals in the order of productivities cause large fluctuations in investment and output. Better economic conditions, expansionary monetary policy and decreases in default probabilities do not always boost investment and welfare. When the model is extended to allow for endogenous occupational choice, would-be safe-type entrepreneurs might inefficiently select to become workers. In a numerical example, it is shown that (a) the interest rate elasticity of investment is considerably higher during booms than during busts, and (b) a decrease in interest rates during busts has an effect on both the intensive and extensive margin.

Keywords: Credit market, adverse selection, signalling, productivity dispersion, investment, occupational choice, inefficiencies

JEL Classification: D82, E32

Suggested Citation

Dosis, Anastasios, Signalling, Productivity and Investment (June 17, 2018). Available at SSRN: or

Anastasios Dosis (Contact Author)

ESSEC Business School

3 Avenue Bernard Hirsch
B.P 50105
Cergy - Pontoise Cedex, NA 95021

University of Cergy-Pontoise - THEMA ( email )

33 boulevard du port
F-95011 Cergy-Pontoise Cedex, 95011

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