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A "Coalition Proof" Equilibrium For A Private Information Credit Economy

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Author Info

  • LACKER, J.M.
  • WEINBERG, J.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

Paper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 994.

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Length: 38 pages
Date of creation: 1990
Date of revision:
Handle: RePEc:pur:prukra:994

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Related research

Keywords: capital ; investments ; entrepreneurs ; economic equilibrium ; resource allocation;

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References

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  1. Bengt Holmstrom & Roger B. Myerson, 1981. "Efficient and Durable Decision Rules with Incomplete Information," Discussion Papers 495, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Edward C Prescott & Robert M Townsend, 2010. "Pareto Optima and Competitive Equilibria With Adverse Selection and Moral Hazard," Levine's Working Paper Archive 2069, David K. Levine.
  3. 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.
  4. Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April.
  5. 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.
  6. 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.
  7. 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.
  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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Citations

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Cited by:
  1. John A. Weinberg, 1995. "Cycles in lending standards?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 1-18.
  2. Asheim, G.B. & Nilssen, T., 1994. "Non-Discriminating Renegotiation in a Competitive Insurance Market," Papers 25, Laval - Laboratoire Econometrie.
  3. 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.

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