Loanable Funds, Monitoring and Banking
AbstractThis paper studies financial intermediation in a general equilibrium overlapping generations model. Indivisible investment projects combine with informational imperfections to create a (hidden action) moral hazard problem and introduce a role for third-party monitoring. Agency costs at the intermediary level are also considered. Under some conditions, monitors can be viewed as banks facing a non-trivial portfolio diversification problem. Equilibria are derived in which a large national bank coexists with a number of regional banks, a structure of strong empirical relevance. Policies such as a mandatory reserve requirement are shown to have substantial effects on the levels of investment in the economy.
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Bibliographic InfoPaper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 00-21.
Date of creation: Feb 2000
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- Huberto M. Ennis, 2001. "On the size distribution of banks," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-25.
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