Endogenous Specialization and Dealer Networks

Batchimeg Sambalaibat
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Batchimeg Sambalaibat: Princeton University

Working Papers from Princeton University. Economics Department.

Abstract: OTC markets exhibit a core-periphery network: 10-30 central dealers trade frequently and with many dealers, while hundreds of peripheral dealers trade sparsely and with few dealers. Existing work rationalize this phenomenon with exogenous dealer heterogeneity. We build a search-based model of network formation and propose that a core-periphery network arises from specialization. Dealers endogenously specialize in different clients with different liquidity needs. The clientele difference across dealers, in turn, generates dealer heterogeneity and the core-periphery network: The dealers specializing in clients who trade frequently form the core, while the dealers specializing in buy-and-hold investors form the periphery.

Keywords: Network formation; core-periphery; directed search; clientele effect; specialization; intermediation chains; over-the-counter (OTC) markets; search frictions; interdealer markets (search for similar items in EconPapers)
JEL-codes: F10 G10 G19 (search for similar items in EconPapers)
Date: 2019-07
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Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:2019-18

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