Financial intermediation and efficient risk sharing in two-period lived OLG models

Paul Ritschel () and Jan Wenzelburger ()
Additional contact information
Paul Ritschel: University of Kaiserslautern-Landau

Economic Theory Bulletin, 2024, vol. 12, issue 1, No 6, 57-78

Abstract: Abstract This article investigates a two-period lived overlapping-generations (OLG) model that incorporates financial intermediation. A risk-neutral bank offers loan and deposit contracts that insure risk-averse agents against idiosyncratic income shocks. Agents prefer financial intermediation to capital markets if it provides efficient risk sharing. The analysis demonstrates that in any two-period lived OLG model in which productive capital is increasing in investment levels, financial intermediation, when implemented for the purpose of efficient risk sharing, cannot instigate business cycles or complex dynamics. The resulting dynamics is monotonic and qualitatively indistinguishable from the dynamics of the classical OLG model by Diamond (Am Econ Rev 55(5):1126–1150, 1965). Business cycles may only occur if banks offer inefficient contracts. Efficient contracts will, in general, not induce dynamically efficient growth paths.

Keywords: Financial intermediation; Overlapping generations; Risk sharing; Business cycles; Loan contracts (search for similar items in EconPapers)
JEL-codes: D53 E32 E44 G21 O41 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s40505-024-00263-z Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
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:spr:etbull:v:12:y:2024:i:1:d:10.1007_s40505-024-00263-z

Ordering information: This journal article can be ordered from
http://www.springer.com/economics/journal/40505

DOI: 10.1007/s40505-024-00263-z

Access Statistics for this article

Economic Theory Bulletin is currently edited by Nicholas C. Yannelis

More articles in Economic Theory Bulletin from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().