Intermediation in over-the-counter markets with price transparency

Miroslav Gabrovski and Ioannis Kospentaris

Journal of Economic Theory, 2021, vol. 198, issue C

Abstract: A salient feature of over-the-counter (OTC) markets is intermediation: dealers buy from and sell to customers as well as other dealers. Traditionally, the search-theoretic literature of OTC markets has rationalized this as a consequence of random meetings and ex post bargaining between investors. We show that neither of these are necessary conditions for intermediation. We build a model of a fully decentralized OTC market in which search is directed and sellers post prices ex ante. Intermediation arises naturally as an equilibrium outcome for a broad class of matching functions commonly used in the literature. We further explore, both analytically and numerically, how the extent of intermediation depends on the nature of frictions and model primitives. Our numerical exercises also contrast the model's equilibrium implications to those of a benchmark model with random meetings and ex post bargaining.

Keywords: Over-the-counter markets; Search frictions; Intermediation; Price transparency; Competitive search; Sorting (search for similar items in EconPapers)
JEL-codes: D83 G11 G12 G21 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Intermediation in Over-the-Counter Markets with Price Transparency (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:198:y:2021:i:c:s0022053121001812

DOI: 10.1016/j.jet.2021.105364

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