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The paper looks at the role of collateral and intermediation in financing investments. Three variations of a simple information economic model are developed to shed light on the relative roles of these two basic solutions to the information problems attending investmenCi The main model shows that investments will be financed both with information intensive monitoring capital (intermediation) and with uninformed capital (e.g. bank finance). The degree of intermediation is a function of the level of collaterizable assets that a firm has. Less well capitalized firms must utilize more costly, information intensive finance. The paper applies the analysis to describe the likely forms of financing in Eastern Europe and the natural course of investments.
Bengt Holmström (Mon,) studied this question.