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ON THE WELFARE AND DISTRIBUTIONAL IMPLICATIONS OF INTERMEDIATION COSTS

Tiago Cavalcanti and Anne P. Villamil

Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33rd Brazilian Economics Meeting] from ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics]

Abstract: This paper studies the distributional implications of intermediation costs. We built a "Bewley" model economy where individuals experience uninsurable idiosyncratic shocks on labor productivity and financial intermediation is costly. Individuals smooth consumption by making deposits to a financial intermediary in good times and by running down credit balances or getting loans in bad times. Higher intermediation costs (IC) increase the costs for individuals to insure against idiosyncratic shocks and to smooth consumption over time. When IC increase by a factor of 10 from its baseline value of 4% (US case), aggregate welfare decreases by less than 1% of the average consumption. For those at the bottom 1% of the wealth distribution the welfare costs are roughly 41% of their consumption, while for those at the top 1% it is -0.17%.

JEL-codes: E60 G38 O11 (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-dev
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Citations: View citations in EconPapers (1)

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http://www.anpec.org.br/encontro2005/artigos/A05A087.pdf

Related works:
Working Paper: On the Welfare and Distributional Implications of Intermediation Costs (2007) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:anp:en2005:087

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