Informed Intermediation over the Cycle

We construct a dynamic model of financial intermediation in which changes in the information held by financial intermediaries generate asymmetric credit cycles as the ones documented by Reinhart and Reinhart (2010). We model financial intermediaries as "expert" agents who have a unique ability to acquire information about firm fundamentals. While the level of "expertize" in the economy grows in tandem with information that the "experts" possess, the gains from intermediation are hindered by informational asymmetries. We find the optimal financial contracts and show that the economy inherits not only the dynamic nature of information flow, but also the interaction of information with the contractual setting. We introduce a cyclical component to information by supposing that the fundamentals about which experts acquire information are stochastic. While persistence of fundamentals is essential for information to be valuable, their randomness acts as an opposing force and diminishes the value of expert learning. Our setting then features economic fluctuations due to waves of "confidence" in the intermediaries' ability to allocate funds profitably.