The Governance of Perpetual Financial Intermediaries

33 Pages Posted: 29 Dec 2013

See all articles by José Penalva

José Penalva

Universidad Carlos III, Madrid - Business Economics Department

Jos van Bommel

Luxembourg School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 27, 2013

Abstract

In this paper we re-examine the risk sharing potential of inter- generational financial intermediaries taking into account their governance structure. We argue that asset buffers of perpetual institutions are limited by the temptation of the living stakeholders to renegotiate contributions and distributions. We characterize the renegotiation constraint and show that it severely limits intergenerational risk sharing. Without renegotiation frictions, intermediaries cannot provide higher welfare than a market. The existence of (self-imposed) renegotiation costs relaxes the constraint. By forming a single monopolist intermediary, agents can further improve welfare.

Keywords: Financial Intermediation, Overlapping Generations, Pension Plans

JEL Classification: G21, D91

Suggested Citation

Penalva, José and van Bommel, Jos, The Governance of Perpetual Financial Intermediaries (December 27, 2013). Available at SSRN: https://ssrn.com/abstract=2372438 or http://dx.doi.org/10.2139/ssrn.2372438

José Penalva

Universidad Carlos III, Madrid - Business Economics Department ( email )

Calle Madrid 126
Getafe, 28903
Spain

Jos Van Bommel (Contact Author)

Luxembourg School of Finance ( email )

4 Rue Albert Borschette
Luxembourg, L-1246
Luxembourg

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