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Optimal Intermediary Contracts

Author

Listed:
  • Nabi Arjmandi
  • Chao Gu
  • Joseph Haslag
  • Yajie Wang

Abstract

We study the role of pledgeability in shaping optimal intermediary contracts. We develop a model in which financial intermediaries offer deposit contracts to partially insure lenders against idiosyncratic risks and extend collateralized loans to borrowers with limited commitment. The model shows that a nonmonotonic relationship between contract terms and pledgeability emerges in general equilibrium. The nonmonotonicity arises as the equilibrium contract terms depend on the elasticities of both loan demand and deposit supply. Our framework helps explain the puzzling response of corporate loans following the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act. We also use the framework to investigate how unexpected shocks affect financial stability and how pledgeability influences welfare under the Glass-Steagall Act.

Suggested Citation

  • Nabi Arjmandi & Chao Gu & Joseph Haslag & Yajie Wang, 2026. "Optimal Intermediary Contracts," Auburn Economics Working Paper Series auwp2026-02, Department of Economics, Auburn University.
    • Handle: RePEc:abn:wpaper:auwp2026-02
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    References listed on IDEAS

    as
    1. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
    2. Stephen D. Williamson, 1987. "Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(1), pages 135-145.
    3. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 169-215.
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    Keywords

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    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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