Intermediation and vertical integration
This paper views financial intermediaries as vertically integrated firms. The authors explore how competitive conditions in retail and wholesale funding markets affect the incentive for (upstream) originators and (downstream) fund managers to integrate. The underlying tradeoff in our model is driven by the choice between the production of an illiquid but high yielding loan and a liquid but relatively low yielding bond. The authors find that greater homogeneity among savers has two effects, both of which tend to increase the incentive to form integrated intermediaries. Greater homogeneity both increases competition between independent fund managers and reduces the likelihood of inefficient underinvestment by integrated intermediaries. The authors also find that the incentive to integrate is greater when fund managers have more power in the market for firms' securities.
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Volume (Year): (1998)
Issue (Month): Aug ()
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447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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- Ernst-Ludwig von Thadden, 1995. "Long-Term Contracts, Short-Term Investment and Monitoring," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 557-575.
- Bhattacharya Sudipto & Thakor Anjan V., 1993. "Contemporary Banking Theory," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 2-50, October.
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- Winton Andrew, 1995. "Delegated Monitoring and Bank Structure in a Finite Economy," Journal of Financial Intermediation, Elsevier, vol. 4(2), pages 158-187, April.
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