This paper highlights a pecuniary externality that results in excessive financing costs. Firms borrow to finance purchases of an inelastically supplied input, bidding up its price. Since higher input prices necessitate more debt obligations, this leads to an increase in intermediation costs. A quantitative interpretation of the model suggests that it is optimal to tax financial intermediation by increasing the borrowing rate by 3 percentage points. (JEL E13, E44, G21, G32, H21, H25)
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