This paper studies a dynamic production economy with financial intermediation. It is assumed that claims held on intermediaries cannot be fully enforced such that intermediation is subject to intermediary equity requirements. It is shown that competitive equilibria are not constrained efficient whenever the aggregate amount of intermediary equity in the economy is low enough to limit production. Specifically, a constrained social planner can achieve a Pareto improvement by creating long-term rents for intermediaries, which immediately reduces intermediary equity requirements. The constrained-efficient allocation can be implemented by a positive tax on future intermediary activity. (JEL D21, D82, D86, G21, G28)
"Optimal Intermediary Rents."
American Economic Journal: Macroeconomics,
Firm Behavior: Theory
Asymmetric and Private Information; Mechanism Design
Economics of Contract: Theory
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Financial Institutions and Services: Government Policy and Regulation