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Intermediary Capital and the Credit Market

Author

Listed:
  • Milton Harris

    (University of Chicago, Chicago, Illinois 60637)

  • Christian C. Opp

    (University of Rochester, Rochester, New York 14627; NBER, Cambridge, Massachusetts 02138)

  • Marcus M. Opp

    (Stockholm School of Economics, 113 83 Stockholm, Sweden; CEPR, London EC1V 0DX, United Kingdom)

Abstract

We propose a tractable framework to examine the role of intermediary capital in the allocation and pricing of credit. In our model, regulated financial intermediaries compete with unregulated investors, targeting distributions of heterogeneous borrowers. We derive a sufficient statistic that characterizes intermediaries’ cross-sectional lending decisions and provide a novel intermediary asset pricing equation that accounts for the endogenous segmentation of marginal investors across securities. These formulae reveal the central role of intermediaries’ shadow cost of capital in both credit allocation and pricing. Our results can concurrently rationalize a broad array of empirical facts documented in the context of credit markets.

Suggested Citation

  • Milton Harris & Christian C. Opp & Marcus M. Opp, 2025. "Intermediary Capital and the Credit Market," Management Science, INFORMS, vol. 71(1), pages 162-183, January.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:1:p:162-183
    DOI: 10.1287/mnsc.2020.01536
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