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The Allocation of Liability: Why Financial Intermediation?

Wang, Tianxi (2009) The Allocation of Liability: Why Financial Intermediation? Working Paper. University of Essex, Department of Economics, Economics Discussion Papers 677. (Unpublished)


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The paper proposes that the organization of financial markets is decided by the allocation of the liability to repay investors. Based on the liability allocation, the paper examines all possible modes of organizing finance and monitoring in an economy a la Townsend (1979). The equilibrium mode is either Financial Intermediation (FI) where the monitor alone takes the liability, or Conglomeration where it is taken by a Conglomerate composed of entrepreneurs and the monitor. Conglomeration also implements the benefit of diversification, which thus does not drive FI. Moreover, opposed to what Diamond (1984) would predict, monitoring costs advantage FI.

Item Type: Monograph (Working Paper)
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences
Faculty of Social Sciences > Economics, Department of
SWORD Depositor: Elements
Depositing User: Elements
Date Deposited: 12 Jul 2012 16:11
Last Modified: 06 Jan 2022 13:37

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