José Penalva, Jos van Bommel

The Governance of Perpetual Financial Intermediaries

Volume 173 () / Issue 3, pp. 498-522 (25)

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We reexamine the risk-sharing potential of intergenerational financial intermediaries, taking into account their governance structure. We argue that asset buffers of perpetual institutions are limited by the temptation of the living stakeholders to renegotiate contributions and distributions. We characterize the renegotiation constraint and show that it severely limits intergenerational risk sharing. Without renegotiation frictions, intermediaries cannot provide higher welfare than a market. The existence of (self-imposed) renegotiation costs relaxes the constraint. By forming a single monopolist intermediary, agents can further improve welfare. (JEL: G21, D91)

José Penalva No current data available.

Jos van Bommel No current data available.