MIDDLEMEN IN SEARCH EQUILIBRIUM WITH INTENSIVE AND EXTENSIVE MARGINS

Grace Xun Gong and Randall Wright

International Economic Review, 2024, vol. 65, issue 4, 1657-1679

Abstract: We study endogenous intermediation activity, the implied transaction pattern—direct trade, indirect trade, or both—and implications for efficiency. Related papers have agents exchanging indivisible goods or assets, capturing only extensive margins (trade frequency). To capture intensive margins, we incorporate divisibility representing quantity or quality. We characterize equilibrium, show how it depends on bargaining powers and costs, and how intensive margins matter—for example, middlemen with high bargaining power may charge more but offer higher quantity/quality, thus improving welfare. A tax‐subsidy policy is designed to achieve efficiency. A monetary version lets us compare money and middlemen and further discuss policy.

Date: 2024
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