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Equilibrium Intermediation and Resource Allocation With a Frictional Credit Market

Author

Listed:
  • Jose V. Rodriguez Mora

    (University of Edinburgh)

  • Christian Bauer

    (University of Munich)

Abstract

We model an economy where financial intermediation is subject to search frictions. The economy may reduce the extent of these frictions by devoting human resources to intermediation. More efficient credit markets (i.e., with less frictions) conduct to more efficient product markets via larger and more efficient firms. They are also conductive to a smaller size of the financial sector, as less resources need to be devoted to channeling funds between lenders and borrowers. Moreover, we show that the amount of resources devoted to intermediation along the growth path is unaffected by the relative abundance of capital. In contrast, improvements in the allocative efficiency in the product market produce a larger financial sector. In a Solow growth version of the model, more efficient credit markets are associated with higher steady state incomes and capital, more demanding selection of firms and, thus, more efficient aggregate production and more homogeneous firms. Outside steady state, the rate of growth for any given capital level is larger the more efficient the financial sector. In an AK version of the model, long run growth is decreasing in the amount of frictions in the credit market.

Suggested Citation

  • Jose V. Rodriguez Mora & Christian Bauer, 2012. "Equilibrium Intermediation and Resource Allocation With a Frictional Credit Market," 2012 Meeting Papers 843, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:843
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    File URL: https://economicdynamics.org/meetpapers/2012/paper_843.pdf
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    References listed on IDEAS

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    1. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-827, August.
    2. Blanchflower, David G & Oswald, Andrew J, 1998. "What Makes an Entrepreneur?," Journal of Labor Economics, University of Chicago Press, vol. 16(1), pages 26-60, January.
    3. Diego Valderrama & Katheryn N. Russ, "undated". "A Theory of Banks, Bonds, and the Distribution of Firm Size," Working Papers 915, University of California, Davis, Department of Economics.
    4. Thorsten Koeppl & Jonathan Chiu, 2013. "Trading Dynamics With Adverse Selection and Search," 2013 Meeting Papers 201, Society for Economic Dynamics.
    5. Becsi, Zsolt & Li, Victor E. & Wang, Ping, 2005. "Heterogeneous borrowers, liquidity, and the search for credit," Journal of Economic Dynamics and Control, Elsevier, vol. 29(8), pages 1331-1360, August.
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    Cited by:

    1. Paolo Giordani, 2015. "Entrepreneurial finance and economic growth," Journal of Economics, Springer, vol. 115(2), pages 153-174, June.

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