PublicationWorking Papers

Endogenous Financial Intermediation

Radim Bohácek, Hugo Rodríguez Mendizábal

Social Sciences > Economics > Finance

This working paper analyzes the endogenous creation of financial intermediaries. We construct an occupational choice model where agents differ amongst themselves in their accumulated assets and skill level. Every period these agents have to choose among three occupations: a worker, an entrepreneur or a banker. Financial intermediaries (bankers) have access to a transaction technology through which they can first attract funds from depositors and then assign these funds to borrowers. In the process of intermediation, bankers and entrepreneurs face financial constraints, so that the allocation of capital is not fully efficient.

In our model, intermediating assets consumes productive resources, and any agent is free to choose that occupation. In this manner intermediating activities improve on the allocation of resources but at a cost. We analyze to what extent this activity approximates the economy to the constraintefficient equilibrium.