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|
|Date Deposited:||17 Dec 2010 14:32|
|Last Modified:||21 Apr 2015 23:14|
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