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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.

Suggested Citation

  • Ludovic RENOU, 2003. "Beliefs about Beliefs and Endogenous Formation of a Multi-lender Coalition in a Costly State Verification Model," Economics Working Papers ECO2003/21, European University Institute.
  • Handle: RePEc:eui:euiwps:eco2003/21
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    Keywords

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

    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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