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Financial Intermediation, Optimality, and Efficiency

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Jeffrey M. Lacker

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Abstract

A model is presented with heterogeneous investment opportunities and endogenous financial intermediaries in an overlapping generations setting. The result obtained in standard dynamic models--that equilibria are suboptimal whenever the marginal product of capital is less than the population growth rate--fails to hold in the presence of costly intermediaries. The marginal product of capital alone is no longer the correct indicator of optimality; an allocation is not Pareto optimal if the population growth rate is greater than the "marginal product of capital" minus the intermediation costs associated with the marginal investment.

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Publisher Info
Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 22 (1989)
Issue (Month): 2 (May)
Pages: 364-82
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Handle: RePEc:cje:issued:v:22:y:1989:i:2:p:364-82

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  1. Joseph F. Francois, 1995. "Dynamic Effects Of Trade In Financial Services," International Economic Journal, Korean International Economic Association, vol. 9(3), pages 1-14, October. [Downloadable!] (restricted)
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