A Comment on a Model of Financial Intermediation : Market Signalling in the Long Run

In the short run, efficient financial intermediaries with small initial wealth endowments may not have a sufficient stake in the market to persuade the market of their reliability. This paper demonstrates that the most efficient information producer may emerge as a credible intermediary in the long run. The presence of an informational technology obtainable for a publicly known entry cost is sufficient for the existence of the necessary enforcement mechanism. This allows for an efficient outcome even when investors can neither observe actual costs incurred by the intermediary nor its initial wealth