The Choice of Financing: a Theoretical Model

Abstract

This paper aims to understand under which circumstances the employment of the services of a financial intermediary is preferred to the decentralized capital market, as well as to provide some reasons why these types of financing coexist. In order to do that, it will be developed a model in which the free-rider effects lead to profit opportunities for an intermediary when asymmetric information between lenders and borrowers is present. The analysis is extended to a multi-period setting, where the focus is ascertain if, under repeated interaction between the agents, the availability of information on payment history of a borrower alters the previous results.