Beliefs about Beliefs and Endogenous Formation of a Multi-lender Coalition in a Costly State Verification Model
AbstractThe 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.  and ), 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 InfoPaper provided by European University Institute in its series Economics Working Papers with number ECO2003/21.
Date of creation: 2003
Date of revision:
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costly state verification; higher-order beliefs; multi-lender coalition; heterogenous prior; incomplete information;
Find related papers by JEL classification:
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- G2 - Financial Economics - - Financial Institutions and Services
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