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We study the competitive equilibria of a simple economy with moral hazard and intermediation costs. Entrepreneurs can simultaneously get credit from two types of competing institutions: 'financial intermediaries' and 'local lenders'. The former are competitive firms issuing deposits and having a comparative advantage in diversifying credit risks. The latter are individuals with a comparative advantage in credit arrangements with a 'nearby' entrepreneur. Because of intermediation costs, localdoi:10.1016/j.rie.2005.06.001 fatcat:sbpp4c4sundsvf65ca5svr3qdi