Optimal Intermediary Contracts

Nabi Arjmandi, Chao Gu, Joseph Haslag and Yajie Wang

No auwp2026-02, Auburn Economics Working Paper Series from Department of Economics, Auburn University

Abstract: We study the role of pledgeability in shaping optimal intermediary contracts. We develop a model in which financial intermediaries offer deposit contracts to partially insure lenders against idiosyncratic risks and extend collateralized loans to borrowers with limited commitment. The model shows that a nonmonotonic relationship between contract terms and pledgeability emerges in general equilibrium. The nonmonotonicity arises as the equilibrium contract terms depend on the elasticities of both loan demand and deposit supply. Our framework helps explain the puzzling response of corporate loans following the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act. We also use the framework to investigate how unexpected shocks affect financial stability and how pledgeability influences welfare under the Glass-Steagall Act.

Keywords: Optimal Deposit Contract; Optimal Loan Contract; Pledgeability; Bank Risk; Bankruptcy Abuse Prevention and Consumer Protection Act, Glass-Steagall Act (search for similar items in EconPapers)
JEL-codes: E40 E61 E62 H21 (search for similar items in EconPapers)
Date: 2026-03
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