Financial intermediation and capital reallocation

Hengjie Ai, Kai Li, Fang Yang

Research output: Contribution to journalArticlepeer-review

6 Scopus citations


To understand the link between financial intermediation activities and the real economy, we build a general equilibrium model in which agency frictions in the financial sector affect the efficiency of capital reallocation across firms and generate aggregate economic fluctuations. We develop a recursive policy iteration approach to fully characterize the nonlinear equilibrium dynamics and the off-steady-state crisis behavior. In our model, adverse shocks to agency frictions exacerbate capital misallocation and manifest themselves as variations in total factor productivity at the aggregate level. Our model endogenously generates countercyclical volatility in the aggregate time series and countercyclical dispersion in the marginal product of capital and asset returns in the cross-section.

Original languageEnglish (US)
Pages (from-to)663-686
Number of pages24
JournalJournal of Financial Economics
Issue number3
StatePublished - Dec 2020

Bibliographical note

Publisher Copyright:
© 2020 Elsevier B.V.


  • Capital misallocation
  • Crisis
  • Financial intermediation
  • Limited enforcement
  • Volatility


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