An Information-based Theory of Financial Intermediation

Zachary Bethune, Bruno Sultanum and Nicholas Trachter

The Review of Economic Studies, 2022, vol. 89, issue 5, 2381-2444

Abstract: We build a theory of financial intermediation based on the premise that some investors are better able to figure out the trade motives of their counterparties in bilateral meetings—screening experts. We solve for the equilibrium market structure and study how information asymmetries stemming from heterogeneity in screening expertise shape up the core–periphery trade structure. In particular, the core of the market is populated by screening experts: they have the largest share of trade volume, they are actively engaged in middleman activity, and trade with the most counterparties. Using transaction-level micro-data and information disclosure requirements, we provide extensive evidence consistent only with our theory of financial intermediation.

Keywords: Over-the-counter markets; Intermediation; Private information; D53; D82; G14 (search for similar items in EconPapers)
Date: 2022
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Related works:
Working Paper: An Information-Based Theory of Financial Intermediation (2019)
Working Paper: An Information-based Theory of Financial Intermediation (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:89:y:2022:i:5:p:2381-2444.

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