This paper formulates a new theory of financial intermediation and explains the general structure of credit markets. Borrowers without established credit histories have incentives to repudiate their debt obligations, and are therefore unable to issue debt directly. Banks exist in order to provide finance for this class of borrowers. Banks can curtail borrowers' incentives to default on debt by building a reputation for liquidating defaulters. However, over time, borrowers' concerns about reputation improve their incentives, such that they are able to issue debt directly.
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Publisher Info
Paper provided by University of Exeter, School of Business and Economics in its series Discussion Papers with number
00/18.
Length: 53 pages Date of creation: 2000 Date of revision: Handle: RePEc:fth:exetec:00/18
Contact details of provider: Postal: School of Business and Economics University of Exeter Streatham Court Rennes Drive Exeter EX4 4PU Phone: (01392) 263218 Fax: (01392) 263242 Web page: http://www.exeter.ac.uk/sobe/ More information through EDIRC