Financial Intermediation in Economies with Investment Complementarities

José Jorge () and Joana Rocha ()
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José Jorge: Faculdade de Economia, Universidade do Porto, cef.up
Joana Rocha: Faculdade de Economia, Universidade do Porto

CEF.UP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: When individual returns are increasing in the aggregate level of investment, decentralized individuals fail to internalize the positive externality of their investment on the return of others. This paper shows how financial intermediation mitigates this coordination failure for individuals with private information. When providing financial products with low risk, intermediaries induce individuals with unfavorable private information to invest more. The increase in investment generates positive externalities, thereby raising social welfare and making banks socially desirable.

Keywords: Keywords: Banking; Macroeconomics; Incomplete Information; Coordination; Complementarities; Externalities (search for similar items in EconPapers)
JEL-codes: C72 D62 D82 E44 G21 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2016-01
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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