Fragile Financial Coalitions: the interaction between real returns and social capital

Yena Park, George Mailath, Dirk Krueger and Harold Cole
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Yena Park: University of Rochester

No 1096, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We analyze efficient arrangement of financial coalitions under incomplete enforcement, which are endogenously formed to undertake consumption smoothing and joint investment. We explicitly consider the symmetric contracting conditions of the individuals who seek to deviate from the contract with the initial contracting conditions, by considering the possibility that they can construct deviating coalitions. The self-enforcing contracts for both the original coalition and any deviating coalition rely on the belief in future cooperation and thus we investigate the role of belief coordination on endogenous formation and activities of financial institutions to show both beneficial and harmful effects. The real return on the joint investment can also play both positive and negative role in these symmetric contracting environments. We examine the extent to which the belief coordination and real returns are substitutes or complements, and their implications about self-enforcing arrangements.

Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:1096

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