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A Model of Financial Structure and Financial Fragility

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  • Order, Robert Van

Abstract

This paper presents an asymmetric information model of financial structure. The model has two types of financial institutions: banks and securities markets, both of which can hold loans made to firms to finance investment projects. The securities markets have lower costs, but they have a lemons problem because the banks have better information. The result is an equilibrium that can exhibit fragility in the sense that small parameter changes, such as changes in the cost advantage of the securities market or the risk structure of loans, can lead to discontinuous changes in interest rates, asset prices, and market structure.

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  • Order, Robert Van, 2006. "A Model of Financial Structure and Financial Fragility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 565-585, April.
    • Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:3:p:565-585
    DOI: 10.1353/mcb.2006.0047
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    Cited by:

    1. Anupam Nanda & Stephen Ross, 2012. "The Impact of Property Condition Disclosure Laws on Housing Prices: Evidence from an Event Study Using Propensity Scores," The Journal of Real Estate Finance and Economics, Springer, vol. 45(1), pages 88-109, June.
    2. Susan Schroeder, 2009. "Defining and detecting financial fragility: New Zealand's experience," International Journal of Social Economics, Emerald Group Publishing Limited, vol. 36(3), pages 287-307, February.

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