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Assaf Razin, Efraim Sadka, Chi-Wa Yuen
NBER Working Paper No. 7736
Issued in June 2000
NBER Program(s): IFM
PE
---- Abstract -----
In the presence of asymmetric information, the stage at which financing decisions are made about investment projects in a small open economy is crucial for the composition of international capital inflows as well as for the efficiency of channeling savings into investment. This paper compares the implications of two extreme cases regarding the information possessed by the firms at their financing stage for whether inflows of foreign debt may crowd out foreign equity or the other way round. The scope for corrective tax policies is examined. We also provide a welfare comparison between the two mechanisms of capital flows.
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