Credit frictions and participation in over-the-counter markets

Lucie Lebeau

Journal of Economic Theory, 2020, vol. 189, issue C

Abstract: This paper formalizes a Nash bargaining game between two players constrained by capacity decisions made prior to entering the negotiation. In equilibrium, strategic interactions drive capacity choices to zero and shut trade down despite the existence of gains from trade. The game is embedded in a general equilibrium model of decentralized asset trade with credit frictions to investigate the interaction between availability of credit and investors' participation, modeled through their choices of inventory and payment capacity. Partial access to credit is sufficient to restore trade. The strategic interactions between payment capacity and inventory generate endogenous heterogeneity in holdings, trade sizes and prices, and complementarity between money and credit.

Keywords: Credit frictions; Payment frictions; Over-the-counter markets; Participation; Inventories (search for similar items in EconPapers)
JEL-codes: C7 D83 E44 E51 G12 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:189:y:2020:i:c:s0022053120300934

DOI: 10.1016/j.jet.2020.105100

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