Asymmetric information, credit market and the optimal regulation of brand market

This paper studies the regulation of the brand market conceptualised as the merger & acquisition(M&A) market. By introducing a brand market into an endogenous growth model in which an informational asymmetry exists between capital-producing borrowers and lenders, we show a brand market screens the borrowers at the expense of crowding out real investment. The optimal brand price trades off the screening effect and the crowding out effect. The social planner could levy a reimbursement tax to achieve the optimal brand price. Capital income tax may be allowed to subsidise the brand purchase to activate the brand market. •We show a brand market screens the entrepreneur with different productivity.•Such screening effect comes at a cost of crowding out real investment.•The optimal brand price trades off the screening effect and the crowding out effect.•The social planner could levy a reimbursement tax to achieve the optimal brand price.