The Adverse Selection Approach to Financial Intermediation: Some Characteristics of the Equilibrium Financial Structure

Working Paper 995-5

Posted: 9 Jul 1998

See all articles by John A. Weinberg

John A. Weinberg

Federal Reserve Banks - Federal Reserve Bank of Richmond

Multiple version iconThere are 2 versions of this paper

Date Written: December 1995

Abstract

This paper examines an adverse selection economy in which efficient resource allocation is supported by intermediary contracts (coalitions). Agents differ along an ex ante publicly observable dimension, so that the equilibrium arrangement yields a diverse set of financial arrangements among borrowers, lenders and intermediaries. Loans made by intermediaries would appear to be mispriced relative to a naive benchmark that ignores the (unobservable) adverse selection aspects of the environment. The model also yields an equilibrium mix of intermediated and direct finance which is broadly consistent with popular notions about the determinants of that mix.

JEL Classification: D28, G20

Suggested Citation

Weinberg, John A., The Adverse Selection Approach to Financial Intermediation: Some Characteristics of the Equilibrium Financial Structure (December 1995 ). Working Paper 995-5, Available at SSRN: https://ssrn.com/abstract=7221

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Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

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