Abstract

This paper examines the role of financial intermediaries to provide desirable deposit contracts in an overlapping generation economy where consumers are exposed to preference shocks and exogenous limited market participation. It is impossible for agents to obtain perfect risk-sharing opportunities in an imperfect secondary market while financial intermediaries can provide intra-generation risk-sharing against limited market participation. In addition, by setting up a saving stage, posterity is able to receive inter-generation risk-sharing and they can perfectly smooth consumption patterns in spite of the existence of preference shocks.

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