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Financial Intermediation, Moral Hazard, And Pareto Inferior Trade

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Author Info
Hansen, Bodil Olai (Department of Economics, Copenhagen Business School)
Keiding, Hans (Department of Economics, Copenhagen Business School)
Abstract

We consider a simple model of international trade under uncertainty, where production takes time and is subject to uncertainty. The riskiness of production depends on the choices of the producers, not observable to the general public, and these choices are influenced by the availability and cost of credit. If investment is financed by a bond market, then a situation may arise where otherwise identical countries end up with different levels of interest and different choices of technique, which again implies differences in achieved level of welfare. Under suitable conditions on the parameters of the model, the market may not be able to supply credits to one of the countries. The introduction of financial intermediaries with the ability to control the debtors may change this situation in a direction which is welfare improving (in a suitable sense) by increasing expected output in the country with high interest rates, while opening up for new problems of asymmetric information with respect to the monitoring activity of the banks.

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File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7498
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Publisher Info
Paper provided by Copenhagen Business School, Department of Economics in its series Working Papers with number 07-2004.

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Length: 17 pages
Date of creation: 28 Aug 2006
Date of revision:
Handle: RePEc:hhs:cbsnow:2004_007

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Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
Phone: 38 15 25 75
Fax: 38 15 26 65
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Web page: http://www.cbs.dk/departments/econ/
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Related research
Keywords: Capital outflow; financial intermediaries; moral hazard;

Find related papers by JEL classification:
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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References listed on IDEAS
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  1. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August. [Downloadable!] (restricted)
  2. Newbery, David M G & Stiglitz, Joseph E, 1984. "Pareto Inferior Trade," Review of Economic Studies, Blackwell Publishing, vol. 51(1), pages 1-12, January. [Downloadable!] (restricted)
  3. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 393-414, July. [Downloadable!] (restricted)
  4. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-87, May. [Downloadable!] (restricted)
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  5. Catherine A. Pattillo & Paul Collier & Anke Hoeffler, 1999. "Flight Capital as a Portfolio Choice," IMF Working Papers 99/171, International Monetary Fund.
    Other versions:
  6. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23. [Downloadable!]
    Other versions:
  7. Tornell, Aaron & Velasco, Andes, 1992. "The Tragedy of the Commons and Economic Growth: Why Does Capital Flow from Poor to Rich Countries?," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1208-31, December. [Downloadable!] (restricted)
  8. Clark, Ephraim & Jokung, Octave, 1998. "Risk Aversion, Wealth and International Capital Flows," Review of International Economics, Blackwell Publishing, vol. 6(3), pages 507-15, August.
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