A Mechanism Design Approach to Financial Frictions

Nobuhiro Kiyotaki
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Nobuhiro Kiyotaki: Princeton University

Chapter 9 in The Global Macro Economy and Finance, 2012, pp 177-187 from Palgrave Macmillan

Abstract: Abstract In a thought-provoking article ‘Can a “Credit Crunch” Be Efficient?’ Edward Green and Soo Nam Oh use a mechanism design approach to present a model of financial intermediation in which phenomena qualitatively resembling a ‘credit crunch’ occur but are efficient. In this short chapter, we extend and modify the model of Green and Oh in order to examine how different environments of private information and limited commitment generate different financial frictions. Following a tradition of mechanism design, which considers the market structure as an equilibrium outcome of the underlying environment, we ask questions such as: Which markets are open? Which contracts are used? Which institutions arise? We find that the model of Green and Oh is a useful benchmark to explain the recent literature on the mechanism design approach to financial frictions.

Keywords: Private Information; Individual Income; Optimal Contract; Incentive Constraint; Financial Friction (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1057/9781137034250_10

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