[Nonprofit, mutually owned insurance and banking organizations have significant market shares in the insurance and banking industries. A first step in a systematic study of these financial mutuals is to examine the reasons for their formation. Doing so provides empirical support for the view that these mutuals arose as an efficient means of addressing contracting challenges caused by aggregate uncertainties and moral hazard. A formal model with this property is presented. We argue that information asymmetries do more to explain the kinds of contracts offered by financial mutuals than do agency problems between owners, managers, and customers.]

This paper considers a standard monetary economy with indivisible primary assets and transaction costs. When assets are indivisible, if a steady-state equilibrium with positive savings exists, there necessarily exists a very large set of equilibria. The intermediation of indivisible assets substantially reduces the set of competitive equilibria, and enhances the "flexibility" of prices. We state sufficient conditions for intermediaries to form and hold all primary assets directly. We define and analyze various measures of the consumer surplus created by intermediaries. We show that conventional measures of intermediary output bear no obvious relation to the consumer surplus created by intermediation. Journal of Economic Literature Classification Numbers: E40, G20.

Nonprofit, mutually owned insurance and banking organizations have significant market shares in the insurance and banking industries. A first step in a systematic study of these financial mutuals is to examine the reasons for their formation. Doing so provides empirical support for the view that these mutuals arose as an efficient means of addressing contracting challenges caused by aggregate uncertainties and moral hazard. A formal model with this property is presented. We argue that information asymmetries do more to explain the kinds of contracts offered by financial mutuals than do agency problems between owners, managers, and customers.