Financial Intermediation, Competition, and Risk: a General Equilibrium Exposition

39 Pages Posted: 19 Mar 2010

See all articles by Gianni De Nicolo

Gianni De Nicolo

Johns Hopkins University - Carey Business School; CESifo (Center for Economic Studies and Ifo Institute)

Marcella Lucchetta

Ca Foscari University of Venice

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Date Written: March 1, 2010

Abstract

We study a simple general equilibrium model in which investment in a risky technology is subject to moral hazard and banks can extract market power rents. We show that more bank competition results in lower economy-wide risk, lower bank capital ratios, more efficient production plans and Pareto-ranked real allocations. Perfect competition supports a second best allocation and optimal levels of bank risk and capitalization. These results are at variance with those obtained by a large literature that has studied a similar environment in partial equilibrium, they are empirically relevant, and carry significant implications for financial policy.

Keywords: General Equilibrium, Bank Competition, Market Power Rents, Risk

JEL Classification: D5, G21

Suggested Citation

De Nicolo, Gianni and Lucchetta, Marcella, Financial Intermediation, Competition, and Risk: a General Equilibrium Exposition (March 1, 2010). Available at SSRN: https://ssrn.com/abstract=1568317 or http://dx.doi.org/10.2139/ssrn.1568317

Gianni De Nicolo (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
(410) 234-4507 (Phone)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Marcella Lucchetta

Ca Foscari University of Venice ( email )

Venice
Italy

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