Intermediation Variety

Jason Roderick Donaldson, Giorgia Piacentino, Anjan Thakor

NBER Working Paper No. 25946
Issued in June 2019
NBER Program(s):The Corporate Finance Program

We explain the emergence of a variety of intermediaries in a model based only on differences in their funding costs. Banks have a low cost of capital due to, say, safety nets or money-like liabilities. We show, however, that this can be a disadvantage, because it exacerbates soft-budget-constraint problems, making it costly to finance innovative projects. Non-banks emerge to finance them. Their high cost of capital is an advantage, because it works as a commitment device to withhold capital, solving soft-budget-constraint problems. Still, non-banks never take over the entire market, but coexist with banks in equilibrium.

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Document Object Identifier (DOI): 10.3386/w25946