Removing Capital Constraints Boosts Economy and Welfare in Long Run
The article explores how sharing risks can lead to efficient outcomes in a financial system. By studying different scenarios with and without restrictions on capital accumulation, the researchers found that when intermediaries are not limited in their capital holdings, they tend to accumulate more capital, which can increase the risk of default. Surprisingly, in this case, individuals may end up with higher overall well-being in the long run, even though the allocation is not perfectly efficient.