A Coalition Proof Equilibrium for a Private Information Credit Economy

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 succe...

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Bibliographic Details
Published in:Economic theory 1993-01, Vol.3 (2), p.279-296
Main Authors: Lacker, Jeffrey M., Weinberg, John A.
Format: Article
Language:English
Subjects:
Allocative efficiency
Capital investments
Coalitions
Consumption
Credit
Entrepreneurs
Equilibrium
Financial investments
Information
Investors
Market equilibrium
Nash equilibrium
Production efficiency
Securities markets
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Summary: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 intermedary coalitions.
ISSN:0938-2259
1432-0479
DOI:10.1007/BF01212918