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On The Welfare And Distributional Implications Of Intermediation Costs

  • Tiago V. de V. Cavalcanti
  • Anne P. Villamil

This paper studies the distributional implications of intermediation costs. We built a "Bewley" model economy where individuals experience uninsurable idiosyncratic shocks on labor productivity and financial intermediation is costly. Individuals smooth consumption by making deposits to a financial intermediary in good times and by running down credit balances or getting loans in bad times. Higher intermediation costs (IC) increase the costs for individuals to insure against idiosyncratic shocks and to smooth consumption over time. When IC increase by a factor of 10 from its baseline value of 4% (US case), aggregate welfare decreases by less than 1% of the average consumption. For those at the bottom 1% of the wealth distribution the welfare costs are roughly 41% of their consumption, while for those at the top 1% it is -0.17%.

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Paper provided by ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics] in its series Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33th Brazilian Economics Meeting] with number 087.

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Date of creation: 2005
Date of revision:
Handle: RePEc:anp:en2005:087
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  1. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
  2. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  3. Andrés Erosa & Gustavo Ventura, 2000. "On Inflation as a Regressive Consumption Tax," UWO Department of Economics Working Papers 20001, University of Western Ontario, Department of Economics.
  4. Andres Erosa, 2001. "Financial Intermediation and Occupational Choice in Development," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(2), pages 303-334, April.
  5. Marco Cagetti & Mariacristina De Nardi, 2005. "Entrepreneurship, frictions, and wealth," Working Paper Series WP-05-09, Federal Reserve Bank of Chicago.
  6. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  7. Vincenzo Quadrini, 1997. "Entrepreneurship, saving and social mobility," Discussion Paper / Institute for Empirical Macroeconomics 116, Federal Reserve Bank of Minneapolis.
  8. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
  9. Asli Demirguc-Kunt & Luc Laeven & Ross Levine, 2003. "Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation," NBER Working Papers 9890, National Bureau of Economic Research, Inc.
  10. Javier Diaz-Gimenez & Edward C. Prescott & Terry Fitzgerald & Fernando Alvarez, 1992. "Banking in computable general equilibrium economies," Staff Report 153, Federal Reserve Bank of Minneapolis.
  11. Anne P. Villamil & António Antunes & Tiago V. de V. Cavalcanti, 2005. "Intermediation Costs, Investor Protection, and Economic Development," 2005 Meeting Papers 712, Society for Economic Dynamics.
  12. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 1999. "A new database on financial development and structure," Policy Research Working Paper Series 2146, The World Bank.
  13. Antunes, António & Cavalcanti, Tiago & Villamil, Anne, 2008. "The effect of financial repression and enforcement on entrepreneurship and economic development," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 278-297, March.
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