Benchmarks in Search Markets

Piotr Dworczak, Haoxiang Zhu and Darrell Duffie

No 51, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: We analyze the role of benchmarks in over-the-counter markets subject to search frictions. The publication of a benchmark can, under conditions, raise total social surplus by (i) increasing the volume of beneficial trade, (ii) facilitating more efficient trade matching between dealers and customers, and (iii) reducing total search costs. Although the improvement in market transparency caused by benchmarks may lower dealer profit margins on each trade, dealers may nevertheless introduce a benchmark such as LIBOR in order to encourage greater market participation by investors. In some cases, low-cost dealers may introduce a benchmark in order to increase their market share through reducing entry by high-cost dealers, a further source of efficiency gain.

Date: 2015
New Economics Papers: this item is included in nep-dge
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Related works:
Journal Article: Benchmarks in Search Markets (2017)
Working Paper: Benchmarks in Search Markets (2014)
Working Paper: Benchmarks in Search Markets (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:51

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