On the efficiency of long intermediation chains

Vincent Glode, Christian Opp and Xingtan Zhang

Journal of Financial Intermediation, 2019, vol. 38, issue C, 11-18

Abstract: Intermediation chains represent a common pattern of trade in over-the-counter markets. We study a classic problem impeding trade in these markets: an agent uses his market power to inefficiently screen a privately informed counterparty. We show that, generically, if efficient trade is implementable via any incentive-compatible mechanism, it is also implementable via a trading network that takes the form of a sufficiently long intermediation chain. We characterize information sets of intermediaries that ensure this striking result. Sparse trading networks featuring long intermediation chains might thus constitute an efficient market response to frictions, in which case no regulatory action is warranted.

Keywords: Intermediation Chains; Monopoly Power; Asymmetric Information; Over-the-Counter Trading Networks (search for similar items in EconPapers)
JEL-codes: D82 D85 G23 L12 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:38:y:2019:i:c:p:11-18

DOI: 10.1016/j.jfi.2017.08.006

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