Financial intermediation with risk aversion


Hellwig, Martin


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URL: https://ub-madoc.bib.uni-mannheim.de/2868
URN: urn:nbn:de:bsz:180-madoc-28683
Document Type: Working paper
Year of publication: 1998
The title of a journal, publication series: Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung
Volume: 98-39
Place of publication: Mannheim
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Sonderforschungsbereich 504 > Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung (Laufzeit 1997 - 2008)
Subject: 330 Economics
Classification: JEL: G20 D80 ,
Subject headings (SWD): Finanzintermediäre , Bank , Agency-Theorie , Risiko , Allokation
Keywords (English): Financial intermediation , allocation of risks
Abstract: The paper extends Diamond's (1984) analysis of financial intermediation to allow for risk aversion of the intermediary. It shows that, as in the case of risk neutrality, the agency costs of external funds provided to an intermediary are relatively small if the intermediary is financing many entrepreneurs with stochastically independent returns. Even though the intermediary is adding rather than subdividing risks, the underlying large-numbers argument is not invalidated by the presence of risk aversion. With risk aversion of entrepreneurs as well as the intermediary, financial intermediation provides insurance as well as finance. In contrast to earlier results on optimal intermediation policies under risk neutrality, the paper shows that when an intermediary is financing many entrepreneurs with stochastically independent returns, optimal intermediation policies must shift return risks away from risk averse entrepreneurs and impose them on the intermediary or on final investors.
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Hellwig, Martin (1998) Financial intermediation with risk aversion. Open Access Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung Mannheim 98-39 [Working paper]
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