Interest Rates and Investment Under Competitive Screening and Moral Hazard

37 Pages Posted: 11 Jan 2017 Last revised: 24 Dec 2017

See all articles by Anastasios Dosis

Anastasios Dosis

ESSEC Business School; University of Cergy-Pontoise - THEMA

Date Written: December 22, 2017

Abstract

This paper studies the effect of (market) interest rate changes on investment under competitive screening and moral hazard. Lower (higher) rates ease (hinder) the provision of incentives to entrepreneurs with positive NPV projects to invest in their best project but hinder (ease) banks' efforts to distinguish them from entrepreneurs with negative NPV projects. This might result in a hump-shaped investment curve. Under low rates, screening through limit pricing leaves insufficient profits to low-wealth entrepreneurs to invest in their best project, and consequently, several project qualities might co-exist in equilibrium. Several testable and other implications on the effectiveness of unconventional monetary policy to boost investment are discussed.

Keywords: Interest rates, entrepreneurial wealth, investment, competitive screening, moral hazard

JEL Classification: D82, E30, E44, E58, G01, G21

Suggested Citation

Dosis, Anastasios, Interest Rates and Investment Under Competitive Screening and Moral Hazard (December 22, 2017). Available at SSRN: https://ssrn.com/abstract=2896286 or http://dx.doi.org/10.2139/ssrn.2896286

Anastasios Dosis (Contact Author)

ESSEC Business School

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

University of Cergy-Pontoise - THEMA ( email )

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

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