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A Mechanism Design Approach to Financial Frictions

In: The Global Macro Economy and Finance

Author

Listed:
  • Nobuhiro Kiyotaki

    (Princeton University)

Abstract

In a thought-provoking article ‘Can a “Credit Crunch” Be Efficient?’ Edward Green and Soo Nam Oh use a mechanism design approach to present a model of financial intermediation in which phenomena qualitatively resembling a ‘credit crunch’ occur but are efficient. In this short chapter, we extend and modify the model of Green and Oh in order to examine how different environments of private information and limited commitment generate different financial frictions. Following a tradition of mechanism design, which considers the market structure as an equilibrium outcome of the underlying environment, we ask questions such as: Which markets are open? Which contracts are used? Which institutions arise? We find that the model of Green and Oh is a useful benchmark to explain the recent literature on the mechanism design approach to financial frictions.

Suggested Citation

  • Nobuhiro Kiyotaki, 2012. "A Mechanism Design Approach to Financial Frictions," International Economic Association Series, in: Franklin Allen & Masahiko Aoki & Jean-Paul Fitoussi & Nobuhiro Kiyotaki & Roger Gordon & Joseph E. S (ed.), The Global Macro Economy and Finance, chapter 9, pages 177-187, Palgrave Macmillan.
    • Handle: RePEc:pal:intecp:978-1-137-03425-0_10
    DOI: 10.1057/9781137034250_10
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    Cited by:

    1. Krasikov, Ilia & Lamba, Rohit, 2021. "A theory of dynamic contracting with financial constraints," Journal of Economic Theory, Elsevier, vol. 193(C).

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