We develop a theoretical model of a network of intermediaries, which we apply to the U.S. mortgage supply chain. In our model, heterogeneous financial norms and systemic vulnerabilities arise endogenously. Intuitively, the optimal behavior of each intermediary, in terms of its attitude toward risk, the quality of the projects that it undertakes, and the intermediaries it chooses to interact wit...

Futures exchanges and other financial intermediaries assume counterparty risks and demand in return guarantees that these counterparties will deliver on their promises. It is often argued that to attract volume, financial intermediaries would settle for excessively low contractual guarantees. In Tano Santos and José Scheinkman (2001) we model financial intermediation in an environment where tra...

Consumers make transactions of different sizes over time. This paper shows that this fact, together with transaction costs of various assets, can help in developing a theory of liquidity. Assets with different cost structures are used to purchase different sizes of transactions. This can explain the demand for money itself, the precautionary demand for money, and the demand for cash and demand ...

We propose a dynamic theory of financial intermediaries as collateralization specialists that are better able to collateralize claims than households. Intermediaries require capital as they can borrow against their loans only to the extent that households themselves can collateralize the assets backing the loans. The net worth of financial intermediaries and the corporate sector are both state ...