Financial Intermediation in Economies with Investment Complementarities

36 Pages Posted: 8 Jul 2016

See all articles by José Jorge

José Jorge

Universidade do Porto, Faculdade de Economia. CEF.UP

Joana Rocha

Universidade do Porto

Date Written: May 2016

Abstract

When individual returns are increasing in the aggregate level of investment, decentralized individuals fail to internalize the positive externality of their investment on the return of others. This paper shows how financial intermediation mitigates this coordination failure for individuals with private information. When providing financial products with low risk, intermediaries induce investment by individuals with unfavorable private information. The increase in investment generates positive externalities, thereby raising social welfare and making banks socially desirable.

Keywords: Banking, Macroeconomics, Incomplete Information, Coordination, Complementarities, Externalities

JEL Classification: G21, E44, D82, C72, D62

Suggested Citation

Jorge, José and Rocha, Joana, Financial Intermediation in Economies with Investment Complementarities (May 2016). Available at SSRN: https://ssrn.com/abstract=2804178 or http://dx.doi.org/10.2139/ssrn.2804178

José Jorge (Contact Author)

Universidade do Porto, Faculdade de Economia. CEF.UP ( email )

Faculdade Economia
Rua Dr Roberto Frias
Porto, 4200-464
Portugal
+351 225 571 100 (Phone)
+351 225 505 050 (Fax)

HOME PAGE: http://https://sigarra.up.pt/fep/pt/FUNC_GERAL.FORMVIEW?p_codigo=235892

Joana Rocha

Universidade do Porto

Rua Dr. Roberto Frias
4200-464 Porto
Portugal

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