Intermediation Game

This chapter introduces the model assumptions of this book: Finitely many banks with possibly distinct equity compete for loans and deposits in a double-sided Bertrand game with market-side switching. Deposit supply and loan demand result from investment and saving decisions of potential entrepreneurs who may switch market sides depending on the offered interest rates. The game-theoretic formalization of the bank competition has two stages: In the first stage, banks choose interest rates. In the second stage, resources are allocated depending on the interest rates and on the entrepreneurs’ investment and saving decisions. Lastly, this chapter introduces and defines the concepts of subgame perfect Nash equilibria and credit rationing used throughout the book.