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A "coalition proof" equilibrium for a private information credit economy

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  • Jeffrey M. Lacker
  • John A. Weinberg

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 can only be supported through the formation of a form of financial intermediary coalition. ; A preliminary draft of this paper was presented at the 1990 meeting of the WEA. We would like to thank Paul Fisher for his comments on that earlier draft. We have also benefited from extensive discussions with Charles Kahn. His comments, and those of Nicholas Yannelis and other participants in the University of Illinois Microeconomic Theory workshop and the Purdue Macroeconomics workshop are greatly appreciated. As the authors retain mutual responsibility for all errors, past, present and future, comments continue to be appreciated. The views expressed are those of the authors and do not represent the views of the Federal Reserve Bank of Richmond or the Federal Reserve Board.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 90-08.

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Date of creation: 1990
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Handle: RePEc:fip:fedrwp:90-08

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Keywords: Capital market;

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References

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  1. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January.
  2. Holmstrom, Bengt & Myerson, Roger B, 1983. "Efficient and Durable Decision Rules with Incomplete Information," Econometrica, Econometric Society, vol. 51(6), pages 1799-819, November.
  3. 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.
  4. 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.
  5. 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.
  6. John H. Boyd & Edward C. Prescott & Bruce D. Smith, 1988. "Organizations in economic analysis," Working Papers 385, Federal Reserve Bank of Minneapolis.
  7. Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April.
  8. 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 90-2, Chicago - Economics Research Center.
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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 95-05, Federal Reserve Bank of Richmond.
  2. John A. Weinberg, 1995. "Cycles in lending standards?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 1-18.
  3. Asheim, Geir B. & Nilssen, Tore, 1996. "Non-discriminating renegotiation in a competitive insurance market," European Economic Review, Elsevier, vol. 40(9), pages 1717-1736, December.

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