Essays in financial intermediation

This dissertation consists of three essays in financial intermediation. The first essay develops a theory of deposits as a safer means of payment (bank notes or checks) in competing with money (cash). It turns out that banks can lend out the money from deposits for a charge, and this supply of inside money increases the total money supply in the economy. Comparative statics show that the existence of banks improves the social welfare. The second essay shows that strategic behavior between banks in overcoming asymmetric information in the lending market leads to changes in credit standards that result in credit crunches. We investigate the amplification mechanism and provide empirical evidence that changes in banking lending standards is an important part of business cycle dynamics. The third essay explains the IPO market dynamics in terms of volume and pricing with a model of the IPO process as a repeated certification game where investment banks produce information about IPO firms. The IPO price and the underwriting fee serve to screen firms to control the quality of the firms going public. In the case with more than one investment bank, the "reputations" of investment banks are interpreted as a form of market segmentation to economize on the social cost of information production.