Exclusive Portfolio Dealing and Market Inefficiency

Natalie Kessler, Iman Lelyveld and Ellen van der Woerd
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Natalie Kessler: Vrije Universiteit Amsterdam
Ellen van der Woerd: De Nederlandsche Bank

No 24-019/IV, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We rationalize exclusive portfolio dealing in a novel three-period partial equilibrium framework populated by a representative, risk-neutral seller and a small number of ex ante identical broker-dealers. Endowed with independent, uncertain demand for a representative asset, the broker-dealers may compete in prices for exclusivity. If no exclusivity is granted, due to either the lack or seller rejection of offers, the seller enters a second-price auction with a zero-loss reserve price. While seller profits are constant under exclusivity (Bertrand Paradox), auction profits increase in the number of broker-dealers. Therefore, exclusivity arises in equilibrium only for a seller with at most two broker-dealers, reducing the trade frequency by one-third. The results are robust to endogenizing the number of broker-dealers and to allowing for the ex post asymmetry in asset demand. Exclusivity, however, does not arise when the auction features a seller-optimal reserve price. We motivate and conclude with an application to the security lending market.

Keywords: Exclusive Dealing; Intermediated Markets; Competition; Market Efficiency (search for similar items in EconPapers)
JEL-codes: D43 D86 G14 G24 (search for similar items in EconPapers)
Date: 2024-03-20
New Economics Papers: this item is included in nep-des and nep-gth
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Related works:
Working Paper: Exclusive Portfolio Dealing and Market Inefficiency (2024)
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