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Beliefs about Beliefs and Endogenous Formation of a Multi-lender Coalition in a Costly State Verification Model

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  • Ludovic RENOU

Abstract

The paper generalizes a costly state verification model along two dimensions: 1) diversity of opinions, and 2) endogenous formation of a financial intermediary, modeled as a multilender coalition. In contrast with previous contributions (e.g. [35] and [36]), our model can account for the coexistence of financial intermediation and direct lending (a non-trivial equilibrium). We prove the existence of such non-trivial equilibria and provide a complete characterization of them. Under some parameter conditions, the stronger the diversity of opinions, the smaller the expected coalition size.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2003/21.

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Date of creation: 2003
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Handle: RePEc:eui:euiwps:eco2003/21

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Keywords: costly state verification; higher-order beliefs; multi-lender coalition; heterogenous prior; incomplete information;

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