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Endogenous Financial Intermediation and Real Effects of Capital Account Liberalization

41 Pages Posted: 25 May 2002  

George Alessandria

Federal Reserve Bank of Philadelphia

Jun Qian

Fanhai International School of Finance, Fudan University; University of Pennsylvania - Wharton Financial Institutions Center

Multiple version iconThere are 2 versions of this paper

Date Written: June 2004

Abstract

We consider lending and investment under asymmetric information in a small, developing economy. We allow different forms of financing contracts to arise endogenously in the credit market. Financial intermediaries mitigate a moral hazard problem in investment choice through costly monitoring and liquidation. We then examine the impact of opening the capital account on both welfare and the structure of lending contracts. Depending on the quality and cost of the monitoring technology, liberalizing the capital account may improve or worsen the efficiency of financial intermediaries, leading to an improvement or worsening of the aggregate composition of investment projects. Efficient financial intermediaries are neither necessary nor sufficient for a capital account liberalization to improve welfare.

Keywords: Financial intermediation, capital account, moral hazard, lending contracts

JEL Classification: G2, F3, O1

Suggested Citation

Alessandria, George and Qian, Jun, Endogenous Financial Intermediation and Real Effects of Capital Account Liberalization (June 2004). Available at SSRN: https://ssrn.com/abstract=310241 or http://dx.doi.org/10.2139/ssrn.310241

George A. Alessandria

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
(215) 574-6402 (Phone)
(215) 574-4364 (Fax)

Jun Qian (Contact Author)

Fanhai International School of Finance, Fudan University ( email )

Shanghai
China
86-21-62934520 (Phone)
86-21-62934572 (Fax)

HOME PAGE: http://www.saif.sjtu.edu.cn/en/professors/2101

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
Philadelphia, PA 19104
United States

HOME PAGE: http://fic.wharton.upenn.edu/fic/

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