Research Discussion Papers, Bank of Finland
No 5/2002:
Financial institutions and the allocation of talent
Vesa Kanniainen and Mikko Leppämäki
Abstract: The paper shows that uninformed finance gives rise to
excessive entry, both in human-capital-intensive and in conventional
industries when the financial institutions cannot identify the
entrepreneurial talent. Introduction of informed capital (eg venture
capital finance) with superior screening ability results in an
institutional equilibrium with efficiency gains in human-capital
industries. Contrary to received wisdom, the institutional equilibrium with
informed capital is characterised by more limited entry to an industry,
which requires highly talented human capital. Unexpectedly, the total
welfare effect is ambiguous, as the allocation of non-informed capital is
now less efficient in the conventional industry. The institutional
equilibrium is shaped by investors’ risk preferences, costs of establishing
uninformed and informed capital, and the initial distribution ot talent in
the economy.
Keywords: allocation of talent; asymmetric information; financial institutions; venture capital; institutional equilibrium; (follow links to similar papers)
JEL-Codes: D82; G00; G24; (follow links to similar papers)
26 pages, March 12, 2002
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