Intermediary Capital and the Credit Market

Milton Harris (), Christian C. Opp () and Marcus Opp
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Milton Harris: University of Chicago, Chicago, Illinois 60637
Christian C. Opp: University of Rochester, Rochester, New York 14627; NBER, Cambridge, Massachusetts 02138

Management Science, 2025, vol. 71, issue 1, 162-183

Abstract: We propose a tractable framework to examine the role of intermediary capital in the allocation and pricing of credit. In our model, regulated financial intermediaries compete with unregulated investors, targeting distributions of heterogeneous borrowers. We derive a sufficient statistic that characterizes intermediaries’ cross-sectional lending decisions and provide a novel intermediary asset pricing equation that accounts for the endogenous segmentation of marginal investors across securities. These formulae reveal the central role of intermediaries’ shadow cost of capital in both credit allocation and pricing. Our results can concurrently rationalize a broad array of empirical facts documented in the context of credit markets.

Keywords: composition of credit; intermediary asset pricing; credit rationing; public market substitution; capital regulation (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:1:p:162-183

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