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On The Welfare And Distributional Implications Of Intermediation Costs

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  • Tiago V. de V. Cavalcanti
  • Anne P. Villamil

Abstract

This paper studies the distributional implications of intermediation costs. We built a "Bewley" model economy where individuals experience uninsurable idiosyncratic shocks on labor productivity and financial intermediation is costly. Individuals smooth consumption by making deposits to a financial intermediary in good times and by running down credit balances or getting loans in bad times. Higher intermediation costs (IC) increase the costs for individuals to insure against idiosyncratic shocks and to smooth consumption over time. When IC increase by a factor of 10 from its baseline value of 4% (US case), aggregate welfare decreases by less than 1% of the average consumption. For those at the bottom 1% of the wealth distribution the welfare costs are roughly 41% of their consumption, while for those at the top 1% it is -0.17%.

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Bibliographic Info

Paper provided by ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics] in its series Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33th Brazilian Economics Meeting] with number 087.

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Date of creation: 2005
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Handle: RePEc:anp:en2005:087

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  1. Marco Cagetti & Mariacristina De Nardi, 2006. "Entrepreneurship, Frictions, and Wealth," Journal of Political Economy, University of Chicago Press, vol. 114(5), pages 835-870, October.
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  3. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
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  5. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
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  7. Andrés Erosa, 2000. "Financial Intermediation and Occupational Choice in Development," UWO Department of Economics Working Papers 20003, University of Western Ontario, Department of Economics.
  8. Asli Demirguc-Kunt & Luc Laeven & Ross Levine, 2003. "Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation," NBER Working Papers 9890, National Bureau of Economic Research, Inc.
  9. Vincenzo Quadrini, 2000. "Entrepreneurship, Saving and Social Mobility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 1-40, January.
  10. Erosa, Andres & Ventura, Gustavo, 2002. "On inflation as a regressive consumption tax," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 761-795, May.
  11. Antunes, António & Cavalcanti, Tiago & Villamil, Anne, 2008. "The effect of financial repression and enforcement on entrepreneurship and economic development," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 278-297, March.
  12. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 1999. "A new database on financial development and structure," Policy Research Working Paper Series 2146, The World Bank.
  13. Anne P. Villamil & António Antunes & Tiago V. de V. Cavalcanti, 2005. "Intermediation Costs, Investor Protection, and Economic Development," 2005 Meeting Papers 712, Society for Economic Dynamics.
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Cited by:
  1. Alexandre Rands Barros, 2005. "The Impact Of State Owned Banks On Interest Rates Spread," Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33th Brazilian Economics Meeting] 041, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].

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