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Optimal Intermediation Under Aggregate Consumption Uncertainty

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  • Ioannis Lazopoulos

    (University of Surrey)

Abstract

The paper develops a banking framework where a welfare comparison is made between non-tradable demand deposit and equity contracts. Contrary to the existing literature that relies heavily on smooth preferences assumption to justify the liquidity insurance superiority of the ‘run-prone’ debt contracts over the ‘run-free’ equity contracts, the paper shows that when aggregate consumption uncertainty is introduced, the welfare dominance of deposit contracts emerges for a simpler preference structure as deposit contracts offer more risk-sharing opportunities. The model illustrates that such uncertainty creates a high dispersion between the allocations that can be attained by trading in the secondary market, and therefore the equity contract provides ex ante less risk-sharing to risk-averse consumers than a tailored-made debt contract.

Suggested Citation

  • Ioannis Lazopoulos, 2010. "Optimal Intermediation Under Aggregate Consumption Uncertainty," School of Economics Discussion Papers 0710, School of Economics, University of Surrey.
    • Handle: RePEc:sur:surrec:0710
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    File URL: https://repec.som.surrey.ac.uk/2010/DP07-10.pdf
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    Cited by:

    1. is not listed on IDEAS
    2. Simas Kucinskas, 2015. "Aggregate Risk and Efficiency of Mutual Funds," Tinbergen Institute Discussion Papers 15-113/VI, Tinbergen Institute.
    3. Kučinskas, Simas, 2019. "Aggregate risk and efficiency of mutual funds," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 1-11.

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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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