Turnpike Banking: Only the Meek Shall Inherit the Earth

We consider the transitions, among intragenerational (autarkic) and intergenerational financing and liquidity risk-sharing mechanisms, in an overlapping generations model with endogenous levels of long-lived investments. The existence and characterization of a Self-Sustaining Mechanism, stable across generations, are established. The long-run equilibrium outcome is shown to depend on the risk-aversion, and propensity for early liquidity needs, of the agents.

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