Review of Finance Vol. 5 No. 1-2 2001
Loanable Funds, Monitoring and Banking
Abstract
This paper studies financial intermediation in a general equilibrium overlapping generations model. Indivisible investment projects combine with informational imperfections to create a (hidden action) moral hazard problem and introduce a role for third-party monitoring. Agency costs at the intermediary level are also considered. Under some conditions, monitors can be viewed as banks facing a non-trivial portfolio diversification problem. Equilibria are derived in which a large nationwide bank coexists with a number of community-regional banks, a structure of strong empirical relevance. Policies such as a mandatory reserve requirement are shown to have substantial effects on the levels of investment in the economy.
- DOI
- 10.1023/a:1012642601216
- Volume
- 5
- Issue
- 1-2
- Pages
- 79-114
- Language
- en
- Sources
- openalex crossref