Intermediation as Rent Extraction

Maryam Farboodi, Gregor Jarosch, Guido Menzio and Ursula Wiriadinata
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Maryam Farboodi: MIT
Gregor Jarosch: Princeton University
Ursula Wiriadinata: IMF

Working Papers from Princeton University. Economics Department.

Abstract: We propose a theory of intermediation as rent extraction, and explore its implications for the extent of intermediation, welfare and policy. A frictional asset market is populated by agents who are heterogeneous with respect to their bargaining skills, as some can commit to take-it-or-leave-it offers and others cannot. In equilibrium, agents with commitment power act as intermediaries and those without act as final users. Agents with commitment trade on behalf of agents without commitment to extract more rents from third parties. If agents can invest in a commitment technology, there are multiple equilibria differing in the fraction of intermediaries. Equilibria with more intermediaries have lower welfare and any equilibrium with intermediation is inefficient. Intermediation grows as trading frictions become small and during times when interest rates are low. A simple transaction tax can restore efficiency by eliminating any scope for bargaining.

Keywords: Intermediation; Search frictions; Rent extraction (search for similar items in EconPapers)
JEL-codes: D40 (search for similar items in EconPapers)
Date: 2019-08
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Related works:
Working Paper: Intermediation as Rent Extraction (2017)
Working Paper: Intermediation as Rent Extraction (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:2019-15

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