Financial Intermediation, markets, and growth

Falko Fecht () and Kevin X. D. Huang ()

No 464, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: This paper contributes to the literature comparing the relative performance of financial intermediaries and markets by studying an environment in which a trade-off between risk sharing and growth arises endogenously. Financial intermediaries provide insurance to households against a liquidity shock. Households can also invest directly on a financial market if they pay a cost. In equilibrium, the ability of intermediaries to share risk is constrained by the market. Moreover, intermediaries invest less in the productive technology when they provide more risk-sharing. This creates a trade-off between risk-sharing and growth. We show the mix of intermediaries and market that maximizes welfare depend on parameter values

Keywords: Financial intermediation; financial markets; risk-shring; growth (search for similar items in EconPapers)
JEL-codes: E44 G10 G20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-fin, nep-mac and nep-mfd
Date: 2004
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