In this article an environment in which the investment opportunities of agents are private information is studied and it is shown that financial intermediaries arise endogenously within that environment. It is established that financial intermediaries are part of an efficient arrangement in the sense that they are needed to support the authors' private information core allocations. These intermediaries, which are coalitions of agents, exhibit the following characteristics in equilibrium: they borrow from and lend to large groups of agents; they produce information about investment projects; and they issue claims that have different state contingent payoffs than claims issued by ultimate borrowers.
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* We thank Jack Kareken for interesting us in this project and providing ments. We also thank workshop participants at Carnegie-Mellon University, Chicago, the University of Pennsylvania, and the Federal Reserve Bank particular, Douglas W. Diamond, Edward J. Green, Bruce D. Smith, Robert M. Townsend, and Oliver E. Williamson. We gratefully acknowledge from the National Science Foundation. ’ The views expressed herein are our own Bank of Minneapolis or the Federal Reserve