Abstract:*

Entrepreneurs who seek financing for projects typically do so in decentralized markets where they need to approach investors sequentially. We study the impact of the sequential nature of primary capital markets on market outcomes in the presence of privately informed investors. We show that sequential markets give rise to a dynamic adverse selection externality that results in inefficient overinvestment and excessive rents to intermediaries. On the extensive margin, the rents enjoyed by investors attract excessive entry relative to the social benefits of the information they produce, while the high cost of capital deters potential entrepreneurs from entering the market.

*Co-authored with I. Makarov (LSE)

General information:

Attendance to this seminar is possible by invitation only. Please send an e-mail to finsec-abs@uva.nl if your are interested in attending this seminar.