Abstract

Observations on Investment Volume and Risk Allocation

Contrary to the 1991 findings of Ne/ Nuippsel, there is no influence bearing on investment decisions in situations of asymmetrical distribution of information before contracts are concluded between entrepreneurs and investors seeking to obtain capital participations. Where the mere weighing of risk-sharing considerations against investment motivations suggests to an entrepreneur that it is recommendable for him to deviate from the optimum risk allocation, distortions in the allocation of capital cannot be ruled out. Increased asymmetry in the distribution of information (prior to contract conclusion) with the possibility of overcoming it by signalling will not result in any further distortion in the allocation of capital, although it will in fact lead to reduced quasireturns because of wider deviations from the optimal risk allocation. The reason at the base of this conclusion is that an entrepreneur who is not more than indifferent towards the implementation of his investment project does not assume any signalling costs in any state of signalling balance. Both the correction of the mistake and the more broadly-based approach thus show that the central conclusion for the importance of risk allocation for investment activity is rather robust