Theory of Financial Intermediation: Dr. Vittorio Larocca
The Department of Economics and Social Sciences welcomed Dr. Vittorio Larocca from Luiss Guido Carli who presented a theoretical model in which financial intermediaries strategically compete by offering different types of financial services, on February 27, 2019.
Individuals are uncertain about their future consumption needs, so the question is if financial intermediaries offering liquidity services can help consumers smooth their consumption pattern over time. In a seminal paper Diamond and Dybvig showed that banks can indeed provide liquidity insurance, however the financial system is prone to bank runs and panics that can trigger a financial crisis. Building on Diamond and Dybvig’s model, Dr. Larocca investigates in his paper (“Financial Intermediation in Diamond and Dybvig Economies”) conditions under which allowing depositors to enter into simultaneous contracts with multiple banks (that offer credit services on top of liquidity services) increases social welfare.