## Risk and Intermediation in a Dual Financial Market Model |

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agents Arnott and Stiglitz assumption balance sheet position binding contract borrowers characterized choose comparative statics competitive equilibrium continuum convex costs of intermediation credit risks CRRA defined denoted diversify economy effect entrepre entrepreneur's effort equality equation equilibrium probability equilibrium with intermediation exist financial intermediaries financial market follows given Hence implicit function theorem implies a rise incentive compatibility income inequality increasing intermediation costs investment project lender's expected utility lenders and intermediaries loan contract locally decreasing marginal product market clearing maximize monitoring costs moral hazard moral hazard problem neurs non-binding contracts non-empty non-market optimal choices optimal contracts optimal portfolio order conditions Pareto improvement participation constraint probability measure probability of success product of capital Proposition random variable rate of interest rate on deposits repayment risk aversion risky safe asset safe rate satisfies the participation simple equilibrium smooth equilibrium superior information unit of loan upper hemicontinuity villages zero profit