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This marginal cost may be increasing in the volume of

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Unformatted text preview: t of funds i s by a spread that reflects the marginal cost of lending. This marginal cost may be increasing in the volume of lending by the intermediary if the production function for loans involves diminishing returns to increases in the variable factors, owing to the fixity of some factors (such as specialized expertise or facilities facilities that cannot be expanded quickly).5 Probably Probably a more important determinant of the supply of intermediation derives from the limited capital of intermediaries—or, more fundamentally, the limited capital of the “natural buyers” of the debt of the ultimate borrowers—together with limits limits on the degree to which these natural buyers are able to leverage their positions. tions. The market for the debt of the ultimate borrowers may be limited to a narrow class of “natural buyers” for any of a variety of reasons: special expertise may be required to evaluate such assets; other costs of market participation may be lower for certain investors; or the natural buyers may be less risk averse, or les...
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