lec06_01 - ECON 4721H Money and Banking Lecture 06_01...

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Unformatted text preview: ECON 4721H Money and Banking Lecture 06_01 Satoshi Tanaka University of Minnesota October 31, 2011 Satoshi Tanaka ECON 4721H Money and Banking Lecture 06_01 Economics of Banking I Banks as Monitors Satoshi Tanaka ECON 4721H Money and Banking Lecture 06_01 Today's Question Why do nancial intermediaries (banks) exist? Why don't we invest money directly in rm's projects? Satoshi Tanaka ECON 4721H Money and Banking Lecture 06_01 Banks as Monitors Banks may emerge; 1 To reduce the cost of monitoring the repayment of loans. 2 To reduce the risks to which depositors are exposed. Without intermediaries, there is a tradeo between risk from not diversifying and the costs of monitoring . Satoshi Tanaka ECON 4721H Money and Banking Lecture 06_01 Simple Model 2-period lives. Consumers have y when young and nothing when old. There are two possible investments: Investment a and Investment b . These are capital investments in businesses, and each business can either fail or succeed. Satoshi Tanaka ECON 4721H Money and Banking Lecture 06_01 Model Cont. Consumers do not know if they will fail or succeed when the investment is made. Success or failure is random, and occurs in the following way: if one business fails, the other succeeds. The probability that a succeeds (and b fails) will be denoted by 1 = 1 2 ....
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This note was uploaded on 02/07/2012 for the course ECON 4721H taught by Professor Tanaka during the Fall '11 term at Minnesota.

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lec06_01 - ECON 4721H Money and Banking Lecture 06_01...

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