Working Paper: NBER ID: w25946
Authors: Jason Roderick Donaldson; Giorgia Piacentino; Anjan Thakor
Abstract: We explain the emergence of a variety of intermediaries in a model based only on differences in their funding costs. Banks have a low cost of capital due to, say, safety nets or money-like liabilities. We show, however, that this can be a disadvantage, because it exacerbates soft-budget-constraint problems, making it costly to finance innovative projects. Non-banks emerge to finance them. Their high cost of capital is an advantage, because it works as a commitment device to withhold capital, solving soft-budget-constraint problems. Still, non-banks never take over the entire market, but coexist with banks in equilibrium.
Keywords: intermediation; banks; nonbanks; innovation; financing
JEL Codes: G21; G23; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Nonbanks (G21) | Innovative Projects (O36) |
| Banks (G21) | Soft-Budget Constraint Problems (H72) |
| Type of Financier (G29) | Project Choice of Entrepreneurs (L26) |
| Competition among Financiers (G19) | Presence of Nonbanks (G21) |