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Financial Intermediation, Moral Hazard, And Pareto Inferior Trade

Author

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  • B.O.Hansen
  • H.Keiding

Abstract

A simple two-country model of international trade under uncertainty is considered, where investors choose uncertain projects depending on interest rates, with high rates leading to risky projects. If investment is financed by bond markets, there can be asymmetric equilibria which can be Pareto improved. For some parameter values, investment in one country cannot be financed by the bond market. In this situation, a bank which can monitor the investment choices will improve the welfare in both countries, while giving rise to new problems of information asymmetry

Suggested Citation

  • B.O.Hansen & H.Keiding, 2004. "Financial Intermediation, Moral Hazard, And Pareto Inferior Trade," Econometric Society 2004 Latin American Meetings 140, Econometric Society.
  • Handle: RePEc:ecm:latm04:140
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    File URL: http://www.econ.ku.dk/keiding/research/moralhazardtrade.pdf
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    More about this item

    Keywords

    capital outflow; financial intermediation; moral hazard;

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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