A Smoke Screen Theory of Financial Intermediation

This paper analyzes a stylized (two period) credit market where investors care about the appropriability of the information they produce when they engage in costly ex ante evaluation of borrowers quality. We show that diversified intermediation arises as a dissimulation mechanism allowing investors to extract informational rents in the second period, thereby mitigating the underlying appropriability problem.Financial intermediation ; informational rent ; asymmetric information ; free riding ; diversification