We study the competitive equilibria of a simple economy with moral hazard and intermediation costs. Entrepreneurs can simultaneously get credit from two types of competing institutions: ‘financial intermediaries’ and ‘local lenders’. The former are competitive firms issuing deposits and having a comparative advantage in diversifying credit risks. The latter are individuals with a comparative advantage in credit arrangements with a ‘nearby’ entrepreneur. Because of intermediation costs, local lenders are willing to diversify their portfolio by offering some direct lending to nearby entrepreneurs. We show that, in some cases, a fall in intermediation costs, by inducing local lenders to choose a safer portfolio, reduces entrepreneurs' effort and increases the probability of default. In these cases, taxing intermediaries may be welfare-improving. Jel Classification Numbers. A10, D80, G10, O17.

Risk and intermediation in a dual financial market economy / Reichlin, Pietro; Bloise, G.. - In: RESEARCH IN ECONOMICS. - ISSN 1090-9443. - 59:(2005), pp. 257-279.

Risk and intermediation in a dual financial market economy

REICHLIN, PIETRO;
2005

Abstract

We study the competitive equilibria of a simple economy with moral hazard and intermediation costs. Entrepreneurs can simultaneously get credit from two types of competing institutions: ‘financial intermediaries’ and ‘local lenders’. The former are competitive firms issuing deposits and having a comparative advantage in diversifying credit risks. The latter are individuals with a comparative advantage in credit arrangements with a ‘nearby’ entrepreneur. Because of intermediation costs, local lenders are willing to diversify their portfolio by offering some direct lending to nearby entrepreneurs. We show that, in some cases, a fall in intermediation costs, by inducing local lenders to choose a safer portfolio, reduces entrepreneurs' effort and increases the probability of default. In these cases, taxing intermediaries may be welfare-improving. Jel Classification Numbers. A10, D80, G10, O17.
Financial intermediation, Moral hazard
Risk and intermediation in a dual financial market economy / Reichlin, Pietro; Bloise, G.. - In: RESEARCH IN ECONOMICS. - ISSN 1090-9443. - 59:(2005), pp. 257-279.
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11385/3968
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