Financial intermediation in the context of price-taking equilibrium

This thesis develops two models to explain the endogenous emergence of financial intermediation as a result of the market mechanism. The need for costly generation of information to smooth the allocation of resources plays a key role in these two models.;The first model is an exchange environment with endowed goods which is used to explain the type of financial intermediation involving the transaction between multinational trading companies and OEM manufacturers. I show that this type of financial intermediation endogenously arises in the market and is an efficient institutional arrangement in allocating resources. In this exchange economy, the uncertain quality of goods causes an adverse selection problem in allocating resources. There are two types of agents. Each agent endowed with a good with uncertain quality receives a private signal about the quality. An inspection technology exists and can be used to generate information about the quality of goods with some costs. The equilibrium concept combines contract price-setting used widely in the literature on principal-agent problem with a Walrasian type of market price-taking.;Based on the understanding obtained from the first model, I go to explore a more complicated production environment developed by Boyd and Prescott (1986). In their frequently cited paper, Boyd and Prescott use the concept of core equilibrium to explain the emergence of financial intermediaries. I use the concept of Walrasian equilibrium to show that financial intermediaries emerge as a result of market mechanisms. Some discussion on Pareto efficiency in this complicated environment is made to complement their incomplete discussion. I also discuss the First Welfare theorem and the Second Welfare theorem in this environment with private information. In both models it is possible for private information to cause the nonexistence of equilibrium in the same way as it does in Rothschild and Stiglitz's (1976) incomplete insurance market.