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Why Banks?

Microeconomic Foundations of Financial Intermediaries

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Ilonka Rühle

In the banking literature the existence of financial intermediaries is generally explained in terms of the transformation of risks, terms and lot-sizes. Yet these functions could also be performed by system of perfect and complete markets. Therefore, the approach taken in Why Banks? is to start by investigating the conditions that, in the real world, render markets imperfect and incomplete, namely asymmetric information distribution and uncertainty. Incentive compatible financing instruments (standard debt contracts as well as equity participation) provide a means of solving these problems. Financial intermediaries ultimately owe their existence to their ability to save transaction costs using these instruments and to solve problems relating to the enforcement of contracts.

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Bibliography XVII

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Bibliography Admati, Anat R.; Pfleiderer, Paul (1988): Selling and Trading on Information in Financial Markets, in: The American Economic Review, Papers and Proceedings, vol. 78, 1988, pp. 96 - 103 Admati, Anat R.; Pfleiderer, Paul (1990): Direct and Indirect Sale of Information, in: Econometrica, vol. 58, 1990, pp. 901 - 928 Aghion, Philippe; Bolton, Patrick (1989): The Financial Structure of the Firm and the Problem of Control, in: European Economic Review, vol. 33, 1989, pp. 286- 293 Aghion, Philippe; Bolton, Patrick (1992): An Incomplete Contracts Approach to Financial Contracting, in: The Review of Economic Studies, vol. 59, 1992, pp. 473-494 Akerlof, George A. (1970): The Market for 'Lemons': Quality Uncertainty and the Market Mechanism, in: The Quarterly Journal of Economics, vol. 84, 1970, pp. 488- 500 Akerlof, George A. (1980): A theory of social custom, of which unemployment may be one consequence, in: The Quarterly Journal of Economics, vol. 94, 1980, pp. 749- 775 Albach, Horst (1980): Vertrauen in der okonomischen Theorie, in: Zeitschrift fOr die gesamte Staatswissenschaft, vol. 136, 1980, pp. 2- 11 Albach, Horst; Hunsdiek, Detlef; Kokalj, Ljuba (1986): Finanzierung mit Risikokapital, in: Schriften zur Mittelstandsforschung, No. 15 NF, Stuttgart 1986 Allen, Franklin (1984): Reputation and product quality, in: Rand Journal of Economics, vol. 15, 1984, pp. 311 - 327 XVIII Bibliography Allen, Franklin (1990): The Market for Information and the Origin of Financial Intermediation, in: Journal of Financial Intermediation, vol. 1, 1990, pp. 3- 30 Allen, Franklin; Faulhaber, Gerald (1988): Optimism Invites Deception, in: The Quarterly Journal...

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