Beliefs about Beliefs and Endogenous Formation of a Multi-lender Coalition in a Costly State Verification Model

Ludovic Renou

No ECO2003/21, Economics Working Papers from European University Institute

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.

Keywords: costly state verification; higher-order beliefs; multi-lender coalition; heterogenous prior; incomplete information (search for similar items in EconPapers)
JEL-codes: C7 D8 G2 (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-mfd
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