Risk and intermediation in a dual financial market economy

Bloise, Gaetano and Reichlin, Pietro (2004) Risk and intermediation in a dual financial market economy. [Working Paper]. p. 27.

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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.

Item Type:Report / Paper (Working Paper)
Research documents and activity classification:Working Papers > Non-Refereed Working Papers / of national relevance only
Divisions:Department of Political Science
Additional Information:The definitive version of the paper has been published in "Research in Economics", Vol. 59 (3), Pages 257-279, September 2005.
Uncontrolled Keywords:Financial intermediation, moral hazard.
MIUR Scientific Area:Area 13 - Economics and Statistics > SECS-P/01 Political Economy
Deposited By:Maria Teresa Nistico
Deposited On:17 Dec 2010 15:32
Last Modified:17 Dec 2010 15:32

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