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Financial Intermediation in Economies with Investment Complementarities

Author

Listed:
  • José Jorge

    (Faculdade de Economia, Universidade do Porto, cef.up)

  • Joana Rocha

    (Faculdade de Economia, Universidade do Porto)

Abstract

When individual returns are increasing in the aggregate level of investment, decentralized individuals fail to internalize the positive externality of their investment on the return of others. This paper shows how financial intermediation mitigates this coordination failure for individuals with private information. When providing financial products with low risk, intermediaries induce individuals with unfavorable private information to invest more. The increase in investment generates positive externalities, thereby raising social welfare and making banks socially desirable.

Suggested Citation

  • José Jorge & Joana Rocha, 2016. "Financial Intermediation in Economies with Investment Complementarities," CEF.UP Working Papers 1603, Universidade do Porto, Faculdade de Economia do Porto.
    • Handle: RePEc:por:cetedp:1603
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    References listed on IDEAS

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    Cited by:

    1. José Jorge & Joana Rocha, 2018. "Agglomeration and Industry Spillover Effects in the Aftermath of a Credit Shock," CEF.UP Working Papers 1801, Universidade do Porto, Faculdade de Economia do Porto.
    2. José Jorge & Joana Rocha, 2018. "Agglomeration and Industry Spillover Effects in the Aftermath of a Credit Shock," GEE Papers 0115, Gabinete de Estratégia e Estudos, Ministério da Economia, revised Nov 2018.

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    More about this item

    Keywords

    Keywords: Banking; Macroeconomics; Incomplete Information; Coordination; Complementarities; Externalities;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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