Q2. What have the authors stated for future works in "Direct versus intermediated finance: an old question and a new answer∗" ?
Instead, the authors want to point out that there is an additional, much simpler explanation, which does not appeal to very sophisticated bank services like monitoring or contract renegotiation and which seems to have been overlooked so far. However, hard evidence on the relative importance of monitoring, relationship banking and risk diversification may be difficult if not impossible to obtain, so the best the authors can do is to test the predictions of the theoretical models.
Q3. What is the way to restore market clearing?
One way to restore market clearing then is to increase the credit volume for the high risk type which further decreases the supply for bonds but at the same time lowers the default risk on the bond market and hence increases the demand for bonds.
Q4. What is the essential property that the authors need to obtain the results of the paper?
The essential property that the authors need to obtain the results of the paper is that the investment in the bond is increasing in the return it5there is no bank and no bond market, any investor consumes her period zero endowment in t = 1, i.e. the authors assume that there is a storage technology and that capital is non-perishable.
Q5. What is the effect of a low interest rate on bonds on the credit volume of a?
In the presence of a riskless deposit contract a low interest rate on bonds decreases the investors’ demand for bonds and hence increases the credit volume by the market clearing condition.
Q6. What are the main aspects of the literature that can explain the choice between bank loans and public debt?
The literature mainly focusses on three aspects that can explain the choice between bank loans and public debt, namely information costs, monitoring and renegotiation.
Q7. What is the effect of pooling on the return of type 1’s project?
In the region where pooling is the optimal choice for the bank (λ < λ∗), thecredit volume is increasing in the risk of type θ1’s project and it is decreasing in the expected return of type θ2’s project.
Q8. Where is the credit volume increasing in the risk of the financed project?
In the region where screening is the optimal choice for the bank (λ ≥ λ∗) and where µ1 − K is sufficiently small the credit volume is increasing in the risk of the financed project and decreasing in its expected return.
Q9. What is the way to rule out multiple equilibria on the bond?
In order to rule out multiple equilibria on the bond market the authors will later restrict the parameters of their model such that the best pooling contract always17gives positive profits to the bank.
Q10. What is the maximum interest rate factor on credit that type 2 firms are willing to pay?
in a pooling equilibrium the maximal interest rate factor that banks can pay is given by r∗D = p̄(λ)σ2(µ2 − K) since r∗C = σ2(µ2 − K) is the maximal interest rate factor on credit that type θ2 firms are willing to pay.
Q11. What is the way to determine the bank’s preference for a low quality project?
The authors have seen that the bank’s preference for lower quality projects does not only concern the credit volume but also the type of contract (pooling or screening) that is chosen.
Q12. What is the effect of the credit volume on the default risk of projects?
the authors have seen that the credit volume is increasing in the default risk and decreasing in the expected return of the financed projects.
Q13. How can the authors extend the analysis to the case where investors can diversify their risk on the bond?
Their results can be extended to the case where investors can diversify their risk on the bond market to some extent as long as full diversification is not possible.
Q14. What is the trade-off between the success probability and the expected return?
Since a firm’s willingness to pay is given by σi(µi−K) there is a trade-off between the success probability and the expected return that determines which firm is driven out of the market.