Multi-lender coalitions in costly state verification models

The paper analyzes the endogenous formation of a financial intermediary, modelled as a multi-lender coalition, as the trade-off between economies of scale in monitoring and a 'cost' associated with the partial loss of control over the investments the multi-lender coalition makes. In contrast with previous contributions (e.g., Williamson in J Monet Econ 18:159-179, 1986), the 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. In particular, the stronger the diversity of opinions, the smaller the coalition size is.