Intermediation as rent extraction

Maryam Farboodi, Gregor Jarosch, Guido Menzio and Ursula Wiriadinata

Journal of Economic Theory, 2025, vol. 227, issue C

Abstract: This paper shows that intermediation in asset markets may emerge exclusively because of rent extraction motives. Among dealers with heterogeneous bargaining skills, those with superior skills become intermediaries and constitute the core of the trading network, while those with inferior skills constitute the periphery. Intermediation is privately profitable because agents with superior bargaining skills can take positions and unwind them in the future at a better price than others could. Intermediation arises endogenously despite being socially worthless and the resources invested in bargaining skills are wasted. Using a dataset on the Indonesian interbank market, we document that prices vary with the centrality of buyers and sellers in a way that is uniquely consistent with our theory.

Keywords: Intermediation; Search frictions; Rent extraction (search for similar items in EconPapers)
JEL-codes: D40 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:227:y:2025:i:c:s0022053125000754

DOI: 10.1016/j.jet.2025.106029

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