Konrad, Kai A.
The Domar-Musgrave phenomenon and adverse selection.
In: European Journal of Political Economy, Vol. 7, No. 1: pp. 41-53
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In this paper, the incentive to increased risk taking caused by taxes on risky revenues (the Domar-Musgrave phenomenon) is revaluated. In a capital market equilibrium with adverse selection, the tax is not ineffective. An additional risk consolidation takes place within the collected tax proceeds. If owners of entrepreneurial firms cannot react via a change of ownership structure, then the tax directly affects the investment decision. In other cases, the tax induces firms' owners to cut back share issues. © 1991.