The Allocation of Liability: Why Financial Intermediation?
The paper proposes that the organization of financial markets is decided by the allocation of the liability to repay investors. Based on the liability allocation, the paper examines all possible modes of organizing finance and monitoring in an economy a la Townsend (1979). The equilibrium mode is either Financial Intermediation (FI) where the monitor alone takes the liability, or Conglomeration where it is taken by a Conglomerate composed of entrepreneurs and the monitor. Conglomeration also implements the benefit of diversification, which thus does not drive FI. Moreover, opposed to what Diamond (1984) would predict, monitoring costs advantage FI.
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- Stephen D. Williamson, 1984.
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583, Queen's University, Department of Economics.
- Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September.
- Javier Diaz-Gimenez & Edward C. Prescott & Terry J. Fitzgerald & Fernando Alvarez, 1992.
"Banking in computable general equilibrium economies,"
153, Federal Reserve Bank of Minneapolis.
- Diaz-Gimenez, Javier & Prescott, Edward C. & Fitzgerald, Terry & Alvarez, Fernando, 1992. "Banking in computable general equilibrium economies," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 533-559.
- Gorton, Gary & Winton, Andrew, 2003.
Handbook of the Economics of Finance,
in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 8, pages 431-552
- Gary Gorton & Andrew Winton, 2002. "Financial Intermediation," NBER Working Papers 8928, National Bureau of Economic Research, Inc.
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- Oliver Hart & John Moore, 1988.
"Property Rights and the Nature of the Firm,"
495, Massachusetts Institute of Technology (MIT), Department of Economics.
- Fernando Alvarez & Terry J. Fitzgerald, 1992. "Banking in computable general equilibrium economies: technical appendices I and II," Staff Report 155, Federal Reserve Bank of Minneapolis.
- Martin F. Hellwig, 2000. "Financial Intermediation with Risk Aversion," Review of Economic Studies, Oxford University Press, vol. 67(4), pages 719-742.
- Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
- Dilip Mookherjee & Ivan Png, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 399-415.
- Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 663-691.
- Philip Bond, 2004. "Bank and Nonbank Financial Intermediation," Journal of Finance, American Finance Association, vol. 59(6), pages 2489-2529, December.
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