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A Mechanism Design Approach to Financial Frictions

  • Nobuhiro Kiyotaki
Chapter
Part of the International Economic Association Series book series (IEA)

Abstract

In a thought-provoking article ‘Can a “Credit Crunch” Be Efficient?’ Edward Green and Soo Nam Oh use a mechanism design approach to present a model of financial intermediation in which phenomena qualitatively resembling a ‘credit crunch’ occur but are efficient. In this short chapter, we extend and modify the model of Green and Oh in order to examine how different environments of private information and limited commitment generate different financial frictions. Following a tradition of mechanism design, which considers the market structure as an equilibrium outcome of the underlying environment, we ask questions such as: Which markets are open? Which contracts are used? Which institutions arise? We find that the model of Green and Oh is a useful benchmark to explain the recent literature on the mechanism design approach to financial frictions.

Keywords

Private Information Individual Income Optimal Contract Incentive Constraint Financial Friction 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© International Economics Association 2012

Authors and Affiliations

  • Nobuhiro Kiyotaki
    • 1
  1. 1.Princeton UniversityUSA

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