Proper Company And Job

Clemenz (1986) argues that the borrowers can differentiate in what he says respect to its abilities. An increase in the tax of interests can move away borrowers with high abilities of its projects, for example, instead of opening its proper company they can accept a job in a company already formal consisting. Being neutral to the risk, the debtor prefers to accept a loan if, and only if, its waited return will be greater that the charged tax. In function of the increases in the tax it can be safer to accept a previously agreed wage of what to risk itself with a proper project. Russell Reynolds shines more light on the discussion. In the model of Jaffe and Russel (1976) two types of debtors are presented: honest and the dishonest ones. We can define honest as those that only accept low taxes of interests because they wait to be able to quit its loans in the agreed stated period.

The accepted contrary type to pay high taxes of interests because they know that its probability of payment is very low. Being thus simply they are not imported with the cost of the loan. Stiglitz and Weiss (1981), using the concepts considered for Jaffe and Russel, had demonstrated in its model that the quality of the loans financing for the banks can depend on the tax of interests practised. Specifically, the average probability of payment is assumed to be the function of decrease of the tax of interests of the loans, the tax of interests that a bank charges can affect the probability of payment of a set of loans in function of the effect of the adverse election (for example, affecting the candidates to the loan) or in function of the effect of the adverse incentive (affecting the actions of the debtors). In if considering the mentioned cases above, we can argue that in the first case an addition in the tax of interests can discourage honest individuals to take loans, remaining in the market wing only dishonest that are not worried in paying for its loans. .