We consider an overlapping generations model in which there are a large number of two-period lived agents born each period. A subset of agents is endowed with leisure time in youth and no time in old age. Workers have preferences over consumption in both periods of life, as well as heterogeneous preferences over leisure time in youth. This generates variation in the desire to save across households.
Entrepreneurs have heterogeneous fixed costs associated with running their technologies.
These fixed costs are private information. While heterogeneity of fixed costs generates variation in an entrepreneur's decision of whether to start up their productive technology, those entrepreneurs who decide to undertake production choose to demand identical amounts of labor. They need to finance labor demand through borrowing in excess of their internal funds. This will give rise to increasing returns to scale in the intermediation sector. Given this environment, the economy is organized as follows.