The savings/investment process in capitalist economies is organized around financial intermediation, making them a central institution of economic growth. Financial intermediaries are firms that borrow from consumer/savers and lend to companies that need resources for investment. In contrast, in capital markets investors contract directly with firms, creating marketable securities. The prices o...

The classic Arrow–Debreu framework requires a very large number of specific securities to reach Pareto optimality. present paper shows that financial intermediation can play an important role in maintaining more parsimonious market while still obtaining In the developed, aggregate risk components individual risks are exchanged through highly reduced set nonspecific securities, idiosyncratic ins...

It is well known that among a community of traders in which particular pairs of traders only transact occasionally, and have opportunities to cheat, cooperation can be sustained if information about traders’ reputations can circulate within the group. In many applications, however, the potential for developing reputations is limited. This paper studies how intermediaries (“brokers”) can help to...

This paper proposes a theory of financial intermediation as a form of cognition. It shows that each of the important elements of financial intermediation performs a cognitive role. This includes foundational instruments such as money and institutions such as banks. By demonstrating the cognitive work it performs, this theory also offers a new explanation for emergent financial phenomena, such a...