In this paper, we analyse the existence and uniqueness of equilibrium in a particular class of monopolistic rational expectations models. We show the equivalence between the Kyle (1985) model of insider trading where the insider observes the amount of noise trading and the Kyle (1989) model of informed speculation when there is one risk-neutral insider and many risk-neutral market makers. We show that in these two equivalent models: (i) There exists a unique equilibrium independently of the distribution of uncertainty; (ii) This equilibrium minimizes the expected gains of the informed agent under incentive compatibility constraints. We extend our results to a class of signalling games.

This paper presents a framework for analyzing the costs and benefits of internal versus external capital allocation. We focus primarily on comparing an internal capital market with bank lending. While both represent centralized forms of financing, in the former case the financing is owner-provided, while in the latter case it is not. We argue that the ownership aspect of internal capital allocation has three important consequences: (1) it leads to more monitoring than bank lending; (2) it reduces managers' entrepreneurial incentives; and (3) it makes it easier to efficiently redeploy the assets of projects that are performing poorly under existing management.

This paper examines micro data on U. S. manufacturing firms' inventory behavior during different macroeconomic episodes. Much of the analysis focuses on the 1981–1982 recession, which was apparently caused in large part by tight monetary policy. We find that the inventory investment of firms without access to public bond markets is significantly liquidity-constrained during this period. A similar pattern emerges during the 1974–1975 recession, in which tight money also appears to have played a role. In contrast, such liquidity constraints are largely absent during periods of looser monetary policy in the 1970s and 1980s.