The Effect of a Firm’s Information Flow Structure on Credit Rationing

Abstract

This paper analyzes the effects of the way information is produced and transmitted through an organizational structure on the business dynamics of a firm. Specifically, I study its effects on the agency problem, concluding that it proves to be an efficient and effective solution to overcome the adverse effects of credit rationing. It exercises a tighter cap on the amount an agent can extract from the financier for disclosing his private information ex-ante when in equilibrium with his employee structure and in doing so leashes his personal endeavors. One of the consequences of its effect is that external capital markets would prove more effective and efficient in allocating resources under certain specific principal-agent preferences than internal ones.