"A Search-Theoretic Approach to Efficient Financial Intermediation,"
CEPII Working Paper 2014- 18 , November 2014 , CEPII.
This article develops a search-theoretic model of financial intermediation to study the efficiency condition of the banking sector. Competitive financial intermediation is determined by the search decisions of both households (to find adequate financial products) and banks (to attract depositors through marketing and to select borrowers through auditing) and by the interest rate setting mechanism. The efficiency of the competitive economy requires that interest rates are posted by banks or are bargained under a specific Hosios (1990) condition, which addresses the hold-up problem induced by search frictions on the credit and deposit markets. Interbank market frictions are introduced to show how an interbank market crisis leads to inefficient financial intermediation characterized by credit rationing and high net interest margin.
Banking ; Search ; Search ; Matching ; Switching Costs