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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 that cannot be expanded quickly).5
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 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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