Financial intermediation as a beliefs-bridge between optimists and pessimists
By: Joshua D. Coval, Anjan V. Thakor
Contributors: Thakor, Anjan V.; Harvard Business School. Division of Research
Series: Working paper / Division of Research, Harvard Business School -- 04-024; Working paper (Harvard Business School. Division of Research) -- 04-024
Publisher: Division of Research, Harvard Business School
Published: 2003
Place of publication: Boston]
Language: eng
Number of pages: 45
Description: This paper proposes a new framework for understanding financial intermediation. In contrast to previous research, we consider a setting in which intermediaries possess no inherent information processing or monitoring advantages. Instead, in an economy with overly optimistic entrepreneurs who require funding from overly skeptical (pessimistic) investors, we show that intermediaries can arise endogenously. In such a setting, only a rational intermediary will be sufficiently optimistic to find it worthwhile to invest in a technology for screening entrepreneurs' projects, and yet be pessimistic enough to use this technology. Our framework produces implications consistent with, heretofore unexplained, stylized facts, and a number of others which are, as of yet, untested.
Notes: "September 2003"--Added t.p.

Includes bibliographical references.