The Governance of Perpetual Financial Intermediaries
28 Pages Posted: 16 Mar 2011
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The Governance of Perpetual Financial Intermediaries
The Governance of Perpetual Financial Intermediaries
Date Written: March 16, 2011
Abstract
In this paper we investigate the risk sharing potential of financial intermediaries in an overlapping generations economy. We find that the intermediaries’ allocations are constrained by the temptation of the living to liquidate their intermediary’s assets and share the proceeds amongst themselves. We characterize the characterize this constraint set, and show that only intermediaries that can avoid side trading and the rolling over of deposits can improve on the market allocation. Furthermore, intermediaries may not achieve the constrained optimal allocation because the living are not willing to build a sufficiently large asset buffer.
Keywords: Financial Intermediation, Overlapping Generations
JEL Classification: G21, D91
Suggested Citation: Suggested Citation