DP9792 Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation

Author(s): Thomas Philippon
Publication Date: January 2014
Keyword(s): economic growth, informativeness, investment, price efficiency
JEL(s): E2, G2, N2
Programme Areas: Financial Economics, Economic History
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9792

A quantitative investigation of financial intermediation in the U.S. over the past 130 years yields the following results : (i) the finance industry?s share of GDP is high in the 1920s, low in the 1950s and 1960s, and high again in the 1990s and 2000s; (ii) most of these variations can be explained by corresponding changes in the quantity of intermediated assets (equity, household and corporate debt, assets yielding liquidity services); (iii) intermediation is produced under constant returns to scale with an annual average cost comprised between 1.5% and 2% of outstanding assets; (iv) quality adjustments that take into account changes in the characteristics of firms and households are quantitatively important; and (v) the unit cost of intermediation has not decreased over the past 30 years.