Financial Intermediation and Credit Market Equilibrium: A Model of Matching Market

Kaniska Dam ()
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Kaniska Dam: Department of Economics and Finance, Universidad de Guanajuato

No EC200301, Department of Economics and Finance Working Papers from Universidad de Guanajuato, Department of Economics and Finance

Abstract: We analyse an incentive model of financial market where intermediaries with different monitoring technologies are matched with firms with different levels of initial wealth and a proeject. Firms do not have sufficient wealth to cover the project costs and hence, seek external financing. The intermediaries are the potential investors in the market. We model the financial economy as a two-sided matching game and analyse the equilibrium using stability as a solution concept. In equilibrium, the financial contracts are optimal, and payoffs consumed by firms and intermediaries are endogenous. We also show that, in equilibrium, poorer firms have to rely on more informed capital available in the market and suffer from more intensive monitoring.

Keywords: Financial Intermediation; Moral Hazard; Negatively Assorted Matching (search for similar items in EconPapers)
JEL-codes: C78 D82 E44 G24 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2003-08
New Economics Papers: this item is included in nep-fin, nep-gth, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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