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Financial Intermediation and Credit Market Equilibrium: A Model of Matching Market

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  • Kaniska Dam

    () (Department of Economics and Finance, Universidad de Guanajuato
    Department of Economics, University of Edinburgh)

Abstract

We analyse an incentive model of financial market where intermediaries with different monitoring technologies are matched with firms with different levels of initial wealth and a proeject. Firms do not have sufficient wealth to cover the project costs and hence, seek external financing. The intermediaries are the potential investors in the market. We model the financial economy as a two-sided matching game and analyse the equilibrium using stability as a solution concept. In equilibrium, the financial contracts are optimal, and payoffs consumed by firms and intermediaries are endogenous. We also show that, in equilibrium, poorer firms have to rely on more informed capital available in the market and suffer from more intensive monitoring.

Suggested Citation

  • Kaniska Dam, 2003. "Financial Intermediation and Credit Market Equilibrium: A Model of Matching Market," Department of Economics and Finance Working Papers EC200301, Universidad de Guanajuato, Department of Economics and Finance.
  • Handle: RePEc:gua:wpaper:ec200301
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    File URL: http://economia.ugto.org/WorkingPapers/EC200301.pdf
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    Keywords

    Financial Intermediation; Moral Hazard; Negatively Assorted Matching;

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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