A BARGAINING MODEL OF FINANCIAL INTERMEDIATION

In a financial market, the investor searches for investment projects and bargains with the entrepreneur about the financial contract. Alternatively, he may delegate search and bargaining to a financial intermediary. Delegation generates a commitment advantage in bargaining. It may, however, induce excessively risky investments because the investor cannot monitor the intermediary's search behavior. This restricts the parameter constellations under which equilibrium intermediation occurs. Competition may not reduce the intermediaries' profits to zero because of incentive restrictions.