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Intermediation in Over-the-Counter Markets with Price Transparency

Miroslav Gabrovski () and Ioannis Kospentaris ()

No 202017, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: A salient feature of over-the-counter (OTC) markets is intermediation: dealers buy from and sell to customers as well as other dealers. Traditionally, the search-theoretic literature of OTC markets has rationalized this as a consequence of random meetings and ex post bargaining between investors. We show that neither of these are necessary conditions for intermediation. We build a model of a fully decentralized OTC market in which search is directed and sellers post prices ex ante. Intermediation arises naturally as an equilibrium outcome for a broad class of matching functions commonly used in the literature. We also explore the sorting implications of the equilibrium pattern of trade and show that it is constrained efficient.

Keywords: Over-the-Counter Markets; Search Frictions; Intermediation; Price Transparency; Competitive Search; Sorting (search for similar items in EconPapers)
JEL-codes: D83 G11 G12 G21 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-ban
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