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A Coalition Proof Equilibrium for a Private Information Credit Economy

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  • Lacker, Jeffrey
  • Weinberg, John A

Abstract

This paper examines an economy in which agents with private information about their own productive capabilities seek to raise capital to fund their investment projects. We employ an equilibrium concept which is closely related to Coalition Proof Nash Equilibrium. In equilibrium, all agents who succeed in raising capital (entrepreneurs) are pooled; they all receive the same contract or consumption schedule. Entrepreneurs, however, are separated from those who fail to raise capital. This separation results in productive efficiency for the economy. If the economy has no viable alternative investment opportunity (other than agents' projects) then equilibrium allocations can be supported by a (non-intermediated) securities market. If there is a viable alternative, the equilibrium allocations cannot be supported by a securities market equilibrium. We interpret this case as suggesting the emergence of financial intermediary coalitions.

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 3 (1993)
Issue (Month): 2 (April)
Pages: 279-96

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Handle: RePEc:spr:joecth:v:3:y:1993:i:2:p:279-96

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  1. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
  2. Holmstrom, Bengt & Myerson, Roger B, 1983. "Efficient and Durable Decision Rules with Incomplete Information," Econometrica, Econometric Society, Econometric Society, vol. 51(6), pages 1799-819, November.
  3. Kahn, C.M. & Mookherjee, D., 1990. "The Good The Bad, And The Ugly: Coalition Proof Equilibrium In Ganes With Infinite Strastegiy Spaces," University of Chicago - Economics Research Center, Chicago - Economics Research Center 90-2, Chicago - Economics Research Center.
  4. Greenberg, Joseph, 1989. "Deriving strong and coalition-proof nash equilibria from an abstract system," Journal of Economic Theory, Elsevier, vol. 49(1), pages 195-202, October.
  5. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, Econometric Society, vol. 52(1), pages 21-45, January.
  6. Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April.
  7. John H. Boyd & Edward C. Prescott & Bruce D. Smith, 1988. "Organizations in Economic Analysis," Canadian Journal of Economics, Canadian Economics Association, vol. 21(3), pages 477-91, August.
  8. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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Cited by:
  1. John A. Weinberg, 1995. "The adverse selection approach to financial intermediation: some characteristics of the equilibrium financial structure," Working Paper, Federal Reserve Bank of Richmond 95-05, Federal Reserve Bank of Richmond.
  2. John A. Weinberg, 1995. "Cycles in lending standards?," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Sum, pages 1-18.
  3. Asheim, G.B. & Nilssen, T., 1994. "Non-Discriminating Renegotiation in a Competitive Insurance Market," Papers, Laval - Laboratoire Econometrie 25, Laval - Laboratoire Econometrie.

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