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Financial Intermediation, Optimality, and Efficiency

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  • Jeffrey M. Lacker

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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  • Jeffrey M. Lacker, 1989. "Financial Intermediation, Optimality, and Efficiency," Canadian Journal of Economics, Canadian Economics Association, vol. 22(2), pages 364-382, May.
    • Handle: RePEc:cje:issued:v:22:y:1989:i:2:p:364-82
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