This paper proposes a novel channel, i.e., within-firm intangible-tangible investment composition, through which financial capital flows may have non-trivial implications to allocative efficiency and productivity. Consider a model where only the tangibles can be pledged as collateral for loans....

According to the theory of incomplete contracts, given nonverifiable entrepreneurial project choices together with divergent objectives between an entrepreneur and its outside financier, the entrepreneur can credibly pledge only part of its project outcome for external funding. Meanwhile,...