A BARGAINING MODEL OF FINANCIAL INTERMEDIATION

In a financial market, the investor searches for investment projects a nd bargains with the entrepreneur about the financial contract. Altern atively, he may delegate search and bargaining to a financial intermed iary. Delegation generates a commitment advantage in bargaining. It ma y, however, induce excessively risky investments because the investor cannot monitor the intermediary's search behavior. This restricts the parameter constellations under which equilibrium intermediation occurs . Competition may not reduce the intermediaries' profits to zero becau se of incentive restrictions.