"Smart" Settlement

Mariana Khapko and Marius Zoican
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Mariana Khapko: University of Toronto

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Abstract: Blockchain technology allows for flexible settlement of trades. We build a model of intermediated trading with search frictions and counterparty risk. On the one hand, longer trade-to-settlement time increases counterparty risk exposure. On the other hand, liquidity improves since intermediaries have more time to adjust inventories. Optimal time-to-settlement decreases in counterparty risk and search intensity. However, with flexible time-to-settlement intermediaries specialize in either high- or low-default risk contracts. Consequently, price competition is relaxed. Intermediaries earn rents, increasing in their (common) default rate due to larger scope for specialization. A unique time-to-settlement for all trades in a given security improves welfare.

Keywords: Market design; trade settlement; blockchain; vertical differentiation; D43; D47; G10; G12 (search for similar items in EconPapers)
Date: 2017-05
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Citations: View citations in EconPapers (4)

Published in SFS Cavalcade North America, May 2017, Nashville, Canada

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01491563

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