Optimal Market Size

Kei Kawakami

No 1168, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: This paper studies endogenous market formation in a ?nancial trading model where strategic traders face information asymmetries and aggregate shocks. First, we show that negative participation externalities can arise for a large class of assets. In a decentralized process of market formation, the negative externalities limit competition between intermediaries. The model predicts that free entry into intermediation causes market fragmentation, but it is Pareto-superior to a single market. The model also predicts that the more intense the information asymmetry, the more a security tends to trade in fragmented markets.

Keywords: Asymmetric information; Aggregate shock; Imperfect competition; Market fragmentation; Network externality puzzle (search for similar items in EconPapers)
Pages: 40 pages
Date: 2013
New Economics Papers: this item is included in nep-cta, nep-mic and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://fbe.unimelb.edu.au/__data/assets/pdf_file/0006/796983/1168.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mlb:wpaper:1168

Access Statistics for this paper

More papers in Department of Economics - Working Papers Series from The University of Melbourne Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia. Contact information at EDIRC.
Bibliographic data for series maintained by Dandapani Lokanathan (dandapani.lokanathan@unimelb.edu.au).