Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation
I provide a quantitative interpretation of financial intermediation in the U.S. over the past 130 years. Measuring separately the cost of intermediation and the production of financial services, I find that: (i) the quantity of intermediation varies a lot over time; (ii) intermediation is produced under constant returns to scale; (iii) the annual cost of intermediation is around 2% of outstanding assets; (iv) adjustments for borrowers' quality are quantitatively important; and (v) the unit cost of intermediation has increased over the past 30 years.
This has been a very long project. The first draft dates back to 2007, with a focus on corporate finance, and without the long term historical evidence. This paper really owes a lot to other people, academics and non-academics alike. Darrell Duffie, Robert Lucas, Raghuram Rajan, Jose Scheinkman, Robert Shiller, Andrei Shleifer, and Richard Sylla have provided invaluable feedback at various stages of this project. Boyan Jovanovic, Peter Rousseau, Moritz Schularick, and Alan Taylor have shared their data and their insights, and I have greatly benefited from discussions with Lewis Alexander, Patrick Bolton, Markus Brunnermeier, John Cochrane, Douglas Diamond, John Geanakoplos, Gary Gorton, Robin Greenwood, Steve Kaplan, Anil Kashyap, Ashley Lester, Andrew Lo, Andrew Metrick, William Nordhaus, Matthew Rhodes-Kropf, David Robinson, Kenneth Rogoff, David Scharfstein, Hyun Shin, Jeremy Stein, Gillian Tett, Wallace Turbeville, and Luigi Zingales, as well as seminar participants at Stanford, Yale, NYU, Harvard, Chicago, Princeton, and the Paris School of Economics. I also thank Paul Krugman for his discussion at the 2011 NY Area Monetary conference, Axelle Ferrière, Peter Gross, Andrea Prestipino, Robert Turley, and Shaojun Zhang for research assistance, and the Smith Richardson Foundation for its financial support. I gratefully acknowledge funding from the Smith Richardson Foundation. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Thomas Philippon, 2015. "Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation," American Economic Review, American Economic Association, vol. 105(4), pages 1408-38, April. citation courtesy of