A Model of Financial Structure and Financial Fragility

Robert Van Order

Journal of Money, Credit and Banking, 2006, vol. 38, issue 3, 565-585

Abstract: This paper presents an asymmetric information model of financial structure. The model has two types of financial institutions: banks and securities markets, both of which can hold loans made to firms to finance investment projects. The securities markets have lower costs, but they have a lemons problem because the banks have better information. The result is an equilibrium that can exhibit fragility in the sense that small parameter changes, such as changes in the cost advantage of the securities market or the risk structure of loans, can lead to discontinuous changes in interest rates, asset prices, and market structure.

Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:38:y:2006:i:3:p:565-585

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