This paper analyzes how coordination frictions in the financial intermediation sector impact the cost of capital. In the model, capital belongs to a large number of small investors. A financial intermediary seeks to raise funds to finance a risky capital-intensive project and earns a fee-based income. The more investors participate to the project, the higher its probability of success. Investors observe noisy signals about the true implementation cost of the project. This problem can be analyzed as a typical global game featuring a single threshold equilibrium. It can be shown that the relationship between the probability of success of the project and the rate of return on capital is non-monotonic. We determine the "socially optimal interest rate" that maximizes the probability of success of the project. However, fee-maximizing intermediaries will generally set an interest rate higher than the former, thus bringing about a form of allocative inefficiency Link to the article
PEIA, O. and VRANCEANU, R. (2018). The Cost of Capital in a Model of Financial Intermediation with Coordination Frictions. Oxford Economic Papers, 70(1), pp. 266-285.