Syngjoo Choi (),
Sanjeev Goyal and
Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
Dominant intermediaries are a defining feature of the modern economy. This paper studies the mechanisms that give rise to trading networks with a dominant intermediary. Trades between actors require a direct link or a path that involves intermediaries. Links are costly. Efficiency therefore pushes towards connected networks with few links: this set includes the hub-spoke network, the cycle network and their variants. The hub-spoke network exhibits extreme inequality, while the cycle network yields equal payoffs for all traders. We conduct a large scale experiment on link formation among traders; the game takes place in continuous time and allows for asynchronous choices. The main finding is that the pricing protocol - the rule dividing the surplus between traders and intermediaries - determines which of these two networks arises.
JEL-codes: C92 D83 D85 Z13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-gth and nep-net
Note: sg472, fm442
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2005
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