Adverse selection plays an important role in venture financing. For example, Admati and Pfleiderer (1994) argue that syndication agreements in venture financing may be a response to adverse selection, Dessein (2005) posits that the allocation of control rights is influenced by adverse selection, and Kaplanand Strömberg (2004) assert that agency problems between the entrepreneur and venture capitalist, which are "directly related to asymmetric information," are very important determinants of venture financing contract designs.
“The analysis of the paper has been conducted subject to many limiting assumptions, including a concern with real and not nominal magnitudes, absence of international capital mobility...the key distinction between the resource movement effect and the spending effect of the boom would remain important ingredients in a more complete analysis of the issues arising from the ‘Dutch disease’...We have also not touched on the issue of whether a deliberate policy of preventing a real appreciation... should be pursued.” W.M. Corden and J.P. Neary, Economic Journal (1982), p 841.
The documented experiences of the largest recipients of capital inflows in Asia and Latin America include high investment and consumption, gross domestic product (GDP) growth, increased current account deficits and real exchange rate appreciation. Capital inflows have therefore been both beneficial and problematic. Thus, despite their long-term benefits in increased efficiency in investment and associated technology transfers and economic growth, capital inflows raised serious concerns among policy makers because of their potential effects on macroeconomic stability, the competitiveness of the export sector and the external viability of the recipient countries. The most popular policy response to capital inflows in both Latin America and Asia was sterilization, with the aim to mitigate inflationary pressures and appreciation of the real exchange rate.
Modern quantitative macroeconomics necessarily involves the use of numerical methods in order to compute the equilibrium behavior of a model economy. As initially introduced by Magill (1977) and later used by Kydland and Prescott (1982) in their seminal work on business cycle models, linearization methods have been the preferred solution approach. Such methods are easy to implement and, as shown by Christiano (1990), do not introduce significant approximation errors for many settings studied by macroeconomists.
But, as discussed in Judd (2002), linearization methods are not trouble free. Quoting from that paper: “For example, Tesar (1995) uses the Kydland-Prescott method and found an example where completing asset markets will make agents worse off. This result violates general equilibrium theory and can only be attributed to the numerical method used.” (p.2) More recently, Kim and Kim (2003) have shown that this error in welfare analysis is symptomatic of linearized models and argue in favor of second-order approximation methods; variations on this theme have been developed by Sims (2000) and Schmitt-Grohe and Uribe (2004).
