Factor misallocation across firms has a negative impact on aggregate productivity, which in turn affects living standards. Recent evidence suggest that capital misallocation and productivity losses increased during certain episodes of credit booms associated with a reduction in uncertainty (i.e., risk at the firm level). The purpose of the research project is to understand whether a reduction in uncertainty might contribute to increase capital misallocation and productivity losses, through its effect on bank credit. It is well understood why a reduction in uncertainty may increase the supply of credit to non-financial corporations and thereby stimulate business investment and output. However, the assumptions made in the literature on the (financial) transmission channel of uncertainty movements to the real economy are too restrictive to explain why "too much" capital may flow towards less productive activities. The research project contributes to this literature by modifying a leading theory so as to provide insights on the relationship between uncertainty and capital misallocation. More specifically, it will analyze whether a reduction in uncertainty can impair the ability of banks to screen between low and high-quality entrepreneurs during booms, thereby explaining the increase in capital misallocation and productivity losses.