A smoke screen theory of financial intermediation

Régis Breton ()

Working papers from Banque de France

Abstract: This paper explores the role of diversification and size in protecting information. We present a simple two period credit market with a sophisticated lender faced with competitors who free ride on his screening activity. Absent commitment problems, the lender funds one borrower and exerts optimal evaluation. When borrowers cannot commit to a long term relationship, the free riding problem is responsible for too little evaluation. We show how this problem can be mitigated by simultaneously financing several borrowers. This effect provides a rationale for intermediaries as an `information garbling' device.

Keywords: financial intermediation; informational rent; asymmetric information; free riding; diversification. (search for similar items in EconPapers)
JEL-codes: D82 G00 G21 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2011
New Economics Papers: this item is included in nep-ban and nep-cta
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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https://publications.banque-france.fr/sites/defaul ... g-paper_356_2011.pdf (application/pdf)

Related works:
Working Paper: A Smoke Screen Theory of Financial Intermediation (2007)
Working Paper: A Smoke Screen Theory of Financial Intermediation (2006)
Working Paper: A Smoke Screen Theory of Financial Intermediation (2006)
Working Paper: A Smoke Screen Theory of Financial Intermediation (2006)
Working Paper: A Smoke Screen Theory of Financial Intermediation (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:356

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