The Impact of Asymmetric Information: Applications in Enterpreneurship and Finance

Abstract

This dissertation consists of three essays examining the impact of information asymmetries in context of entrepreneurship and finance. Chapter 2, coauthored with Silvana Krasteva and Liad Wagman, focuses on the asymmetries between a firm and its (researcher) employee and studies the problem faced by a (researcher) employee when choosing whether to pursue an innovative idea as part of his employment at a firm or to form a start-up. An idea by its stand-alone value and by the degree of (positive or negative) externality that it may impose on the employing firm’s existing profits if brought to market. The employee has private information about the innovation and his ability to independently develop it. Internal exploration, while allowing the employee to take advantage of any exploration support offered by the firm, reduces the employee’s claim over his idea. We find that external exploration takes place for ideas weakly related to the firm’s existing offerings, with other ideas being explored internally. We show that if the firm increases its support for exploration, it can induce the internal research of a wider range of ideas; however, by doing so, the firm also increases the likelihood of employees departing to pursue independent ventures at a later stage of development.

Chapter 3 analyzes the benefits of reducing information asymmetry in the credit markets. In their attempt to make more informed decisions, lenders of- ten use a variety of information contained in a borrower ’s credit report. We find that if a borrower expects his future lenders to base their decisions not only on his repayment history but also on other factors like his income, length of history, etc., then his incentives to repay his present loan are weakened. In this case, he is more likely to strategically default on his loan especially for very high levels of interest rates. However, use of this extra information assists the lender in expeditious screening of the borrowers. Based on our results, we recommend that, in order to minimize defaults, more repayment history based products should be offered by the lenders. Evidence supporting the validity of this recommendation is provided in Chapter 4, coauthored with Vijetha Koppa. Using data from Prosper.com, we analyze the effect of reporting repayment histories to an additional credit bureau on borrowers’ default rates and lenders’ internal rates of return. A differences- in-differences comparison between high risk and low risk borrowers reveals that for high risk borrowers, the default rates were 9 to 11 percentage points greater and the internal rates of return were 13 percentage points lower in the pre-change period.