AbstractThis paper studies an environment in which the investment opportunities of agents are private information and shows that financial intermediaries arise endogenously within that environment. It establishes that financial intermediaries are part of an efficient arrangement in the sense that they are needed to support the authors’ private information core allocations. These intermediaries, which are coalitions of agents, exhibit the following characteristics in equilibrium: they borrow from and lend to large groups of agents; they produce information about investment projects; and they issue claims that have different state contingent payoffs than claims issued by ultimate borrowers.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 87.
Date of creation: 1985
Date of revision:
Publication status: Published in Journal of Economic Theory (Vol.38, n.2, April 1986, pp.211-232)
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- NEP-ALL-2002-03-14 (All new papers)
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- Edward C Prescott & Robert M Townsend, 2010.
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- Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
- Smith, Bruce D., 1984. "Private information, deposit interest rates, and the `stability' of the banking system," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 293-317, November.
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