Financial intermediaries and markets

Franklin Allen, Douglas Gale

    Research output: Contribution to journalReview article

    Abstract

    A complex financial system comprises both financial markets and financial intermediaries. We distinguish financial intermediaries according to whether they issue complete contingent contracts or incomplete contracts. Intermediaries such as banks that issue incomplete contracts, e.g., demand deposits, are subject to runs, but this does not imply a market failure. A sophisticated financial system - a system with complete markets for aggregate risk and limited market participation - is incentive-efficient, if the intermediaries issue complete contingent contracts, or else constrained-efficient, if they issue incomplete contracts. We argue that there may be a role for regulating liquidity provision in an economy in which markets for aggregate risks are incomplete.

    Original languageEnglish (US)
    Pages (from-to)1023-1061
    Number of pages39
    JournalEconometrica
    Volume72
    Issue number4
    DOIs
    StatePublished - Jul 2004

    Fingerprint

    Financial intermediaries
    Financial markets
    Incomplete contracts
    Intermediaries
    Financial system
    Market failure
    Complete markets
    Incentives
    Market participation
    Liquidity provision
    Deposits

    Keywords

    • Central banking
    • Complete markets
    • Efficiency
    • Financial crises
    • Financial intermediation
    • General equilibrium

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    Financial intermediaries and markets. / Allen, Franklin; Gale, Douglas.

    In: Econometrica, Vol. 72, No. 4, 07.2004, p. 1023-1061.

    Research output: Contribution to journalReview article

    Allen, Franklin ; Gale, Douglas. / Financial intermediaries and markets. In: Econometrica. 2004 ; Vol. 72, No. 4. pp. 1023-1061.
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