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Intermediation Variety

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  • Jason Roderick Donaldson
  • Giorgia Piacentino
  • Anjan Thakor

Abstract

We explain the emergence of a variety of intermediaries in a model based only on differences in their funding costs. Banks have a low cost of capital due to, say, safety nets or money-like liabilities. We show, however, that this can be a disadvantage, because it exacerbates soft-budget-constraint problems, making it costly to finance innovative projects. Non-banks emerge to finance them. Their high cost of capital is an advantage, because it works as a commitment device to withhold capital, solving soft-budget-constraint problems. Still, non-banks never take over the entire market, but coexist with banks in equilibrium.

Suggested Citation

  • Jason Roderick Donaldson & Giorgia Piacentino & Anjan Thakor, 2019. "Intermediation Variety," NBER Working Papers 25946, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25946
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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