topic10_note

topic10_note - EC372 Bond and Derivatives Markets Topic...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: EC372 Bond and Derivatives Markets Topic #10: Financial Intermediation, II R. E. Bailey Department of Economics University of Essex Outline Contents 1 Financial Intermediation as Delegated Monitoring 1 1.1 Principal-Agent relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2 The Holmstrom & Tirole (HT) Model 2 3 Fixed Investment 4 3.1 Direct finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.2 Indirect finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.3 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.4 Credit Market Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4 Variable Investment 6 Reading: Lecture notes (available online in the CMR) Other references (but not required reading for EC372: 1 Financial Intermediation as Delegated Monitoring Delegated Monitoring Investors delegate responsibility for monitoring borrowers to intermediaries. In the delegated monitoring approach investors (but not necessarily all investors) delegate responsibility to an intermediary (e.g., a bank) to monitor the ultimate recipients (borrowers, e.g., firms) of investors funds. Such delegation could result from several causes, including: (i) economies of scale (inter- mediaries gather funds from investors and lend to many borrowers); (ii) expertise (intermedi- aries have a comparative advantage in spet monitoring skills); (iii) lumpy (indivisible) investment projects (each firms investment project may require the funds of many investors). Aspects of delegated monitoring: 1. Screening assess borrowers creditworthiness 1 2. Prevention check borrowers behaviour 3. Auditing penalise borrowers misbehaviour The classification is taken from Freixas and Rochet, Microeconomics of Banking . 1.1 Principal-Agent relationships Principal-Agent theory: a sketch The principal seeks to control the actions of an agent in the interests of the principal. Suppose principal has complete control over the agent: treat as a single decision-making unit Suppose principal has incomplete control over the agent: scope for genuine principal-agent relationship The principal designs rules to give incentives to the agent to act in the principals interests...
View Full Document

Page1 / 6

topic10_note - EC372 Bond and Derivatives Markets Topic...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online