EconPapers    
Economics at your fingertips  
 

Financial Intermediation with Risk Aversion

Martin Hellwig

The Review of Economic Studies, 2000, vol. 67, issue 4, 719-742

Abstract: The paper extends Diamond's (1984) analysis of financial intermediation to allow for risk aversion of the intermediary. As in the case of risk neutrality, the agency costs of external funds provided to an intermediary are relatively small if the intermediary is financing many entrepreneurs with independent returns. Even though the intermediary is adding rather than subdividing risks, the underlying large-numbers argument is not invalidated by the presence of risk aversion. With risk aversion of entrepreneurs as well as the intermediary, financial intermediation provides insurance as well as finance. In contrast to earlier results on optimal intermediation policies under risk neutrality, the paper shows that when an intermediary is financing many entrepreneurs with independent returns, optimal intermediation policies must shift return risks away from risk averse entrepreneurs and impose them on the intermediary or on final investors.

Date: 2000
References: Add references at CitEc
Citations: View citations in EconPapers (31)

Downloads: (external link)
http://hdl.handle.net/10.1111/1467-937X.00151 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Financial intermediation with risk aversion (1998) Downloads
Working Paper: Financial Intermediation with Risk Aversion (1998) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:67:y:2000:i:4:p:719-742.

Access Statistics for this article

The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman

More articles in The Review of Economic Studies from Review of Economic Studies Ltd
Bibliographic data for series maintained by Oxford University Press ().

 
Page updated 2025-04-17
Handle: RePEc:oup:restud:v:67:y:2000:i:4:p:719-742.