The Governance of Perpetual Financial Intermediaries
33 Pages Posted: 29 Dec 2013
Date Written: December 27, 2013
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: Suggested Citation