(In)efficiency and Intervention in Over-The-Counter Markets

Nicholas Trachter, Bruno Sultanum and Zachary Bethune
Additional contact information
Zachary Bethune: University of Virginia

No 1450, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We augment Duffie et al.(2005), the workhorse model to study asset trade in over-the-counter markets, to allow for asset creation. We show that the equilibrium does not decentralize the efficient allocation. The result follows from the impossibility of having both buyers and sellers take into account the full social value of asset creation when trading. We show how this mis-pricing of assets affects asset issuance, and distorts trading, enhancing misallocation. The inefficiency of the economy provides a rational for financial regulation. We show that regulation can regain efficiency in the economy by a proper choice of a tax scheme, and that the level of intervention decreases with the degree of over-the-counter search frictions in the economy.

Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2017/paper_1450.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:red:sed017:1450

Access Statistics for this paper

More papers in 2017 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().