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The Governance of Perpetual Financial Intermediaries

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  • José Penalva
  • Jos van Bommel

Abstract

We reexamine the risk-sharing potential of intergenerational financial intermediaries, taking into account their governance structure. We argue that asset buffers of perpetual institutions are limited by the temptation of the living stakeholders to renegotiate contributions and distributions. We characterize the renegotiation constraint and show that it severely limits intergenerational risk sharing. Without renegotiation frictions, intermediaries cannot provide higher welfare than a market. The existence of (self-imposed) renegotiation costs relaxes the constraint. By forming a single monopolist intermediary, agents can further improve welfare.

Suggested Citation

  • José Penalva & Jos van Bommel, 2017. "The Governance of Perpetual Financial Intermediaries," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 173(3), pages 498-522, September.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201709)173:3_498:tgopfi_2.0.tx_2-6
    DOI: 10.1628/093245616X14798149327649
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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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