Survey_Gersbach_2018

Abstract

Specifically, consider a simple model in which banks alleviate agency problems in financial contracting. Banks compete for funds and offer credit contracts to potential borrowers. We allow for macroeconomic shocks affecting the average productivity of investment projects. There are two overlapping generations of agents. We focus on the behaviour of the first generation while the second generation may be burdened by bailout costs. We distinguish between bailout and failure, depending on whether insolvent banks are bailed out or have to go bankrupt. Bailout occurs through the second generation. We consider a two-period model (t = 1, 2). Later, when we consider regulatory policies such as bailouts, we will introduce more than one generation of agents living for two periods to guarantee credible deposit insurance by taxing future generations. The generation under consideration consists of a continuum of agents, indexed by [0,1], and living for two periods. There are two classes of agents in each generation. A fraction ? of individuals consists of potential entrepreneurs. The rest, 1 ? ?, of the population are consumers. Potential entrepreneurs and consumers differ insofar that only the former have access to investment technologies. There is one physical perishable good that can be used for consumption or investment. Each individual in each generation receives an endowment e of the good when young and none of it when old. We examine the following four-stage intermediation game for the generation under consideration. 1. Banks offer deposit contracts to consumers and entrepreneurs. 2. Banks offer credit contracts to entrepreneurs. 3. Consumers and entrepreneurs decide which contracts to accept. Resources are exchanged. Entrepreneurs start producing, which is subject to macroeconomic risk. 4. Production ends. Entrepreneurs pay back to banks. Banks pay back depositors. The game is a multi-stage game with observed actions. That is, actions at each stage are chosen simultaneously, and players know the actions in all previous stages when they enter the next stage. As there is a continuum of consumers and entrepreneurs, they are assumed to be contract takers. Banks are the only strategic players that set deposit and loan interest rates.