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Financial intermediaries, markets, and growth

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  • Falko Fecht
  • Kevin Huang

Abstract

This paper contributes to the literature comparing the relative performance of financial intermediaries and markets by studying an environment in which a trade-off between risk sharing and growth arises endogenously. Financial intermediaries provide insurance to households against a liquidity shock. Households can also invest directly on a financial market, if they pay a cost. In equilibrium, the ability of intermediaries to share risk is constrained by the market. Moreover, intermediaries invest less in the productive technology when they provide more risk-sharing. This creates a trade-off between risk-sharing and growth. We show the balance of intermediaries and market that maximizes welfare depend on parameter values.

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File URL: http://repec.org/esNASM04/up.27430.1075497028.pdf
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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 419.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:419

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Keywords: Financial intermediaries; Financial markets; Risk-sharing; Growth;

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