The Emergence of Market Structure

Maryam Farboodi, Gregor Jarosch and Robert Shimer
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Maryam Farboodi: MIT
Gregor Jarosch: Princeton University

Working Papers from Princeton University. Economics Department.

Abstract: What market structure emerges when market participants can choose the rate at which they contact others? We show that traders who choose a higher contact rate emerge as intermediaries, earning profits by taking asset positions that are misaligned with their preferences. Some of them, middlemen, are in constant contact with other traders and so pass on their position immediately. As search costs vanish, traders still make dispersed investments and trade occurs in intermediation chains, so the economy does not converge to a centralized market. When search costs are a differentiable function of the contact rate, the endogenous distribution of contact rates has no mass points. When the function is weakly convex, faster traders are misaligned more frequently than slower traders. When the function is linear, the contact rate distribution has a Pareto tail with parameter 2 and middlemen emerge endogenously. These features arise not only in the (inefficient) equilibrium allocation, but also in the optimal allocation. Moreover, we show that intermediation is key to the emergence of the rest of the properties of this market structure.

Keywords: Over-the-Counter Markets; Intermediation; Middlemen; Random Matching; Endogenous Search Intensity; Network Formation; Pareto Distribution; Welfare (search for similar items in EconPapers)
JEL-codes: E44 G12 G20 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mic, nep-mst and nep-net
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Related works:
Journal Article: The Emergence of Market Structure (2023)
Working Paper: The Emergence of Market Structure (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:2020-40

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