{
  "title": "Capital Flows with Debt- and Equity-Financed Investment-Equilibrium Structure and Efficiency Implications",
  "publication": "IMF Working Papers, November 1, 1998",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/capital-flows-with-debt-and-equity-financed-investment-equilibrium-structure-and-efficiency-2796",
  "canonical": "https://www.imf.org/en/publications/wp/issues/2016/12/30/capital-flows-with-debt-and-equity-financed-investment-equilibrium-structure-and-efficiency-2796",
  "overlayPath": "/en/publications/wp/issues/2016/12/30/capital-flows-with-debt-and-equity-financed-investment-equilibrium-structure-and-efficiency-2796/index.md",
  "summary": "This paper distinguishes between debt and equity flows in the presence of information asymmetry between the firm’s “insiders” and “outsiders” in a small open economy. It shows the inadequacy of capital investment because its scope is too narrow and the investment each firm makes is too little.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Authors: Assaf Razin, Chi-Wa Yuen, Efraim Sadka\n- Date: November 1, 1998\n- Core focus: Distinguishes between debt and equity flows in the presence of information asymmetry between the firm’s “insiders” and “outsiders” in a small open economy.\n- Key conclusion: Capital investment is inadequate because its scope is too narrow and the investment each firm makes is too little.\n- Policy proposal: An unconventional policy tool is proposed to correct the market failure: lump-sum subsidies to firms that choose to equity-finance their investments.\n- Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate."
    },
    {
      "heading": "Major findings and analytical points",
      "content": "- Differentiation of capital flows:\n  - Distinguishes debt-financed flows and equity-financed flows under information asymmetry between insiders and outsiders.\n- Market failure characterization:\n  - Investment inadequacy arises from two dimensions: the scope of capital investment is too narrow and individual firm investment levels are too low.\n- Efficiency implications:\n  - The inefficiencies identified stem from information asymmetries affecting financing choice and consequently aggregate investment."
    },
    {
      "heading": "Policy recommendations",
      "content": "- Proposed corrective instrument:\n  - Lump-sum subsidies to firms that choose to equity-finance their investments.\n- Intended effect:\n  - Correct market failure caused by information asymmetry and encourage equity financing to expand investment scope and level.\n\n---\n\n Content in this bundle\n\n- wp98159\n  - wp98159 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp98159 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/capital-flows-with-debt-and-equity-financed-investment-equilibrium-structure-and-efficiency-2796"
    }
  ],
  "bullets": [
    "[Markdown version](/en/publications/wp/issues/2016/12/30/capital-flows-with-debt-and-equity-financed-investment-equilibrium-structure-and-efficiency-2796/index.md)",
    "[Structured JSON version](/en/publications/wp/issues/2016/12/30/capital-flows-with-debt-and-equity-financed-investment-equilibrium-structure-and-efficiency-2796/index.json)",
    "[Bundle manifest](/en/publications/wp/issues/2016/12/30/capital-flows-with-debt-and-equity-financed-investment-equilibrium-structure-and-efficiency-2796/bundle-manifest.json)",
    "Authors: Assaf Razin, Chi-Wa Yuen, Efraim Sadka",
    "Published: November 1, 1998",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451857641.001",
    "Authors: Assaf Razin, Chi-Wa Yuen, Efraim Sadka",
    "Date: November 1, 1998",
    "Core focus: Distinguishes between debt and equity flows in the presence of information asymmetry between the firm’s “insiders” and “outsiders” in a small open economy.",
    "Key conclusion: Capital investment is inadequate because its scope is too narrow and the investment each firm makes is too little.",
    "Policy proposal: An unconventional policy tool is proposed to correct the market failure: lump-sum subsidies to firms that choose to equity-finance their investments.",
    "Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.",
    "Differentiation of capital flows:",
    "Market failure characterization:",
    "Efficiency implications:",
    "Proposed corrective instrument:",
    "Intended effect:",
    "**_wp98159**"
  ],
  "related": [
    {
      "title": "_wp98159",
      "role": "document",
      "sourceUrl": "https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/_wp98159.pdf",
      "summary": {
        "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/_wp98159.pdf.md",
        "mime": "text/markdown"
      },
      "binary": {
        "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/_wp98159.pdf",
        "mime": "application/pdf"
      }
    }
  ],
  "alternates": {
    "markdown": "/en/publications/wp/issues/2016/12/30/capital-flows-with-debt-and-equity-financed-investment-equilibrium-structure-and-efficiency-2796/index.md",
    "json": "/en/publications/wp/issues/2016/12/30/capital-flows-with-debt-and-equity-financed-investment-equilibrium-structure-and-efficiency-2796/index.json",
    "bundleManifest": "/en/publications/wp/issues/2016/12/30/capital-flows-with-debt-and-equity-financed-investment-equilibrium-structure-and-efficiency-2796/bundle-manifest.json"
  },
  "generatedAtUtc": "2026-09-17T05:36:04.014Z"
}