Financial Intermediation and Income Distribution

46 Pages Posted: 16 Oct 2019 Last revised: 1 Oct 2021

Date Written: August 30, 2020

Abstract

What is the social impact of the financial intermediation sector? I analyze the aggregate and the redistribution impact of financial intermediaries in an economy with a set of potential entrepreneurs. The intermediation sector endogenously develops to relax credit constraints by monitoring a borrowing entrepreneur. Competitive intermediaries i) eradicate non-fundamental-based income inequality by spreading economic opportunity to financially constrained individuals—the redistribution impact, and ii) boost entrepreneurship and restore the socially optimal occupational pattern—the job-creation impact. Although the job-creation impact is socially beneficial, the redistribution impact is not—social surplus declines overall due to a pecuniary externality associated with the redistribution function of the financial intermediation sector. Monopoly intermediation limits the redistribution impact and may raise the utilitarian welfare.

Keywords: Financial Intermediation, Income Inequality, Financing Friction, Entrepreneurship, Moral Hazard, Pledgeability, Externalities.

Suggested Citation

Ebrahimian, Mehran, Financial Intermediation and Income Distribution (August 30, 2020). Available at SSRN: https://ssrn.com/abstract=3465204 or http://dx.doi.org/10.2139/ssrn.3465204

Mehran Ebrahimian (Contact Author)

Stockholm School of Economics ( email )

Drottninggatan 98
Swedish House of Finance
Stockholm, Stockholm 11160
Sweden

HOME PAGE: http://www.mehranebrahimian.com/

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