We study the effects of differences in local financial development within an integrated financial market. We construct a new indicator of financial development by estimating a regional effect on the probability that, ceteris paribus, a household is shut off from the credit market. By using this indicator we find that financial development enhances the probability an individual starts his own bu...

The housing and credit markets are closely linked. This paper presents VAR evidence that house prices can generate financial and business cycle dynamics. An increase in house prices leads to a boom in mortgage and real estate construction lending. Leverage decreases in the short run before rising at longer-run horizons across households and most financial intermediaries, irrespective of their p...

This paper studies a decentralized, dynamic matching and bargaining market: buyers and sellers are matched into pairs. Traders exit the market at a constant rate, inducing search costs (frictions). All price o¤ers are made by sellers. Despite the fact that sellers have all the bargaining power we show that they set competitive prices in the limit when frictions become small. Previous literature...

Financial markets reveal information through which firm managers increase the value of equity, e.g., by improving investment decisions. With debt, however, such decisions are not necessarily socially efficient. We demonstrate that investors’ endogenous information acquisition, acting through this feedback channel, attenuates risk-shifting but amplifies debt overhang. The most ex-ante inefficien...

Financial markets crucially rely on the development of an infrastructure dedicated to the enforcement of contracts. Here we study the effects of limited enforcement capacity on financial contracting by proposing a new theory of costly state verification. In our model the principal contracts with a population of entrepreneurs, who borrow to finance risky projects under limited liability. To sust...

over time depends on the functioning of the financial system. Within this market, banks play a fundamental role as financial intermediaries, providing access to the payment system, transforming assets, managing risk, and monitoring and processing information (Freixas and Rochet, 1998). In this paper we empirically study the role of banks in overcoming the frictions that arise from asymmetric in...