Is There an Optimal Size for the Financial Sector

Anthony M. Santomero and John Seater ()

Center for Financial Institutions Working Papers from Wharton School Center for Financial Institutions, University of Pennsylvania

Abstract: This paper derives the optimal size of the financial sector using a general equilibrium framework that is an extension of Holmstrom and Tirole's 1997 paper. We show that the financial sector has a unique optimal size relative to the size of the economy as a whole. Creating and maintaining this sector requires diversion of some physical capital from production of output to monitoring that production. However, the efficiency gain in output production brought about by monitoring warrants the diversion. It is also found that the optimal size of the financial sector is independent of the state of the economy and does not vary over the business cycle.

Keywords: financial sector; intermediation theory; financial institutions (search for similar items in EconPapers)
JEL-codes: E42 E44 E51 G2 (search for similar items in EconPapers)
Date: 1999-02
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Related works:
Journal Article: Is there an optimal size for the financial sector? (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:wop:pennin:98-35

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