Financial Intermediation, Optimality, and Efficiency

Jeffrey Lacker

Canadian Journal of Economics, 1989, vol. 22, issue 2, 364-82

Abstract: A model is presented with heterogeneous investment opportunities and endogenous financial intermediaries in an overlapping generations setting. The result obtained in standard dynamic models--that equilibria are suboptimal whenever the marginal product of capital is less than the population growth rate--fails to hold in the presence of costly intermediaries. The marginal product of capital alone is no longer the correct indicator of optimality; an allocation is not Pareto optimal if the population growth rate is greater than the "marginal product of capital" minus the intermediation costs associated with the marginal investment.

Date: 1989
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