FINANCIAL INNOVATION IN A GENERAL EQUILIBRIUM-MODEL

We develop a model of financial innovation, in which intermediaries can issue new financial securities against collateral in the form of standard securities. Intermediaries have to market their innovations and marketing is costly. We show that the equilibrium asset structure may exhibit redundancies as frequently observed on financial markets. We give conditions for efficiency of financial innovation and show that with small innovation costs the indeterminacy of equilibrium allocations has small utility consequences. Journal of Economic Literature Classification numbers: D52, G10. (C) 1995 Academic Press, Inc.