Incomplete and the Endogeneity of Central Banking

Gary Gorton

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: In a model with incomplete markets, and agents privately producing a circulating media of exchange to coordinate trade, it is shown that closing another market can be Pareto-improving. Producing private money is costly because contracts with the money issuers must be enforced, creating agency costs. By closing the market for trading the circulating media, agents endogenously create an information asymmetry which can result in banking panics. The information asymmetry is desirable, however, because it creates externalities which force banks to cooperate for mutual regulation and insurance for their monies, thus reducing agency costs. The self-enforcing cooperative coalition of banks replaces the market in enforcing the private money contracts. Agents relying on this unobservable enforcement are said to have "confidence" in the banking system.

References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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:fth:pennfi:16-87

Access Statistics for this paper

More papers in Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research Contact information at EDIRC.
Bibliographic data for series maintained by Thomas Krichel ().