Working Paper: NBER ID: w20255
Authors: Tri Vi Dang; Gary Gorton; Bengt Holmström; Guillermo Ordonez
Abstract: Banks are optimally opaque institutions. They produce debt for use as a transaction medium (bank money), which requires that information about the backing assets - loans - not be revealed, so that bank money does not fluctuate in value, reducing the efficiency of trade. This need for opacity conflicts with the production of information about investment projects, needed for allocative efficiency. Intermediaries exist to hide such information, so banks select portfolios of information-insensitive assets. For the economy as a whole, firms endogenously separate into bank finance and capital market/stock market finance depending on the cost of producing information about their projects.
Keywords: No keywords provided
JEL Codes: D82; E44; G11; G14; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bank opacity (G28) | efficient bank money (G21) |
| suppression of information about backing assets (G32) | efficient bank money (G21) |
| bank opacity (G28) | suppression of information about backing assets (G32) |
| selection of information-insensitive assets (G11) | stability of debt instruments (H63) |
| trade-off between producing information and maintaining liquidity (D83) | dilemma for banks (G21) |