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Financial Intermediation, Loanable Funds and the Real Sector

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  • Bengt Holmstrom
  • Jean Tirole

Abstract

The authors study an incentive model of financial intermediation in which firms as well as intermediaries are capital constrained. They analyze how the distribution of wealth across firms, intermediaries, and uninformed investors affects investment, interest rates, and the intensity of monitoring. The authors show that all forms of capital tightening (a credit crunch, a collateral squeeze, or a savings squeeze) hit poorly capitalized firms the hardest, but that interest rate effects and the intensity of monitoring will depend on relative changes in the various components of capital. The predictions of the model are broadly consistent with the lending patterns observed during the recent financial crises. Copyright 1997, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Paper provided by Massachusetts Institute of Technology (MIT), Department of Economics in its series Working papers with number 95-1.

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Date of creation: Sep 1994
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Handle: RePEc:mit:worpap:95-1

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Web page: http://econ-www.mit.edu/
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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), DEPARTMENT OF ECONOMICS, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
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