Intermediaries and Collective Agency: Lessons from the Banking Industry

We use a formal model based on the banking industry to craft a theory about how the market power and governance structure of intermediaries affect the ability of economic agents to overcome problems of collective agency. A shareholder-owned bank with market power will, by extracting rent from agents, tend to disincentive agents from effort toward economic activity, but the effects of this rent extraction depend critically on the nature of economic codependence. If agents' efforts generate positive externalities for each other, as with co-innovation in an ecosystem, then the bank's rent extraction may greatly exacerbate the agents' tendency to underinvest in effort, perhaps threatening the ecosystem's existence. Conversely, if agents' efforts generate negative externalities, such as where competition dominates cooperation, then the bank's rent extraction may operate as a beneficial tax, dissuading agents from imposing these negative externalities and increasing total value creation. These effects do not arise if the bank is a cooperative that accords financial claims in proportion to an agent's use of the cooperative, a widespread but understudied practice, because an agent then has a countervailing incentive to exert more effort to acquire a larger financial claim on the cooperative bank and thus on the rent the bank extracts from other agents. Our analysis leads to a rich set of testable implications for a variety of industries, and also sheds light on "redlining," a persistent puzzle, whereby banks are accused of not lending in certain communities, despite the apparent presence of creditworthy borrowers there.