Direct versus Intermediated Finance: an Old Question and a New Answer

Anke Gerber

No 87, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: We consider a closed economy where a risk neutral bank competes with a competitive bond market. Firms can finance a risky project either by a bank credit or by issuing a bond which is directly sold to risk averse investors who also can hold safe deposits at the bank. We show that a monopolistic bank tends to allocate more capital to lower quality projects but there are some interesting qualifications. If the asymmetric information concerns only the success probability, then we observe adverse selection while if it concerns only the expected return, bad types are driven out of the market.

Keywords: Credit market; bond market; risk aversion; adverse selection (search for similar items in EconPapers)
JEL-codes: D82 G21 (search for similar items in EconPapers)
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Citations: View citations in EconPapers (1)

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