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Benchmarks in Search Markets

Darrell Duffie, Piotr Dworczak () and Haoxiang Zhu

No 20620, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We characterize the price-transparency role of benchmarks in over-the-counter markets. A benchmark can, under conditions, raise social surplus by increasing the volume of beneficial trade, facilitating more efficient matching between dealers and customers, and reducing search costs. Although the market transparency promoted by benchmarks reduces dealers' profit margins, dealers may nonetheless introduce a benchmark to encourage greater market participation by investors. Low-cost dealers may also introduce a benchmark to increase their market share relative to high-cost dealers. We construct a revelation mechanism that maximizes welfare subject to search frictions, and show conditions under which it coincides with announcing the benchmark.

JEL-codes: D43 D47 D83 G12 G14 G18 G21 G23 (search for similar items in EconPapers)
Date: 2014-10
Note: AP
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Published as DARRELL DUFFIE & PIOTR DWORCZAK & HAOXIANG ZHU, 2017. "Benchmarks in Search Markets," The Journal of Finance, vol 72(5), pages 1983-2044.

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Related works:
Journal Article: Benchmarks in Search Markets (2017) Downloads
Working Paper: Benchmarks in Search Markets (2015) Downloads
Working Paper: Benchmarks in Search Markets (2014) Downloads
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