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Inducing Agents to Report Hidden Trades: A Theory of an Intermediary

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  • Yaron Leitner

Abstract

When contracts are unobserved (and nonexclusive), agents can promise the same asset to multiple counterparties and subsequently default. I show that a central mechanism can extract all relevant information about contracts that agents enter by inducing them to report one another. The mechanism sets position limits and reveals the names of agents who hit the limits according to (voluntary) reports from their counterparties. This holds even if sending reports is costly and even if agents can collude. In some cases, an agent's position limit must be nonbinding in equilibrium. The mechanism has some features of a clearinghouse. Copyright 2012, Oxford University Press.

Suggested Citation

  • Yaron Leitner, 2012. "Inducing Agents to Report Hidden Trades: A Theory of an Intermediary," Review of Finance, European Finance Association, vol. 16(4), pages 1013-1042.
    • Handle: RePEc:oup:revfin:v:16:y:2012:i:4:p:1013-1042
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    File URL: http://hdl.handle.net/10.1093/rof/rfr017
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    Cited by:

    1. Massimiliano Affinito & Matteo Piazza, 2021. "Always Look on the Bright Side? Central Counterparties and Interbank Markets during the Financial Crisis," International Journal of Central Banking, International Journal of Central Banking, vol. 17(1), pages 231-283, March.
    2. Bruno Biais & Florian Heider & Marie Hoerova, 2012. "Clearing, Counterparty Risk, and Aggregate Risk," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(2), pages 193-222, July.
    3. Corradin, Stefano & Heider, Florian & Hoerova, Marie, 2017. "On collateral: implications for financial stability and monetary policy," Working Paper Series 2107, European Central Bank.
    4. Itay Goldstein & Yaron Leitner, 2013. "Stress tests and information disclosure," Working Papers 13-26, Federal Reserve Bank of Philadelphia.
    5. Viral V. Acharya & Aaditya M. Iyer & Rangarajan K. Sundaram, 2020. "Risk-Sharing and the Creation of Systemic Risk," JRFM, MDPI, vol. 13(8), pages 1-38, August.
    6. Goldstein, Itay & Leitner, Yaron, 2018. "Stress tests and information disclosure," Journal of Economic Theory, Elsevier, vol. 177(C), pages 34-69.
    7. Donaldson, Jason Roderick & Gromb, Denis & Piacentino, Giorgia, 2020. "The paradox of pledgeability," Journal of Financial Economics, Elsevier, vol. 137(3), pages 591-605.
    8. Yaron Leitner, 2014. "Should regulators reveal information about banks?," Business Review, Federal Reserve Bank of Philadelphia, issue Q3, pages 1-8.
    9. Jason Donaldson & Denis Gromb & Giorgia Piacentino, 2019. "Conflicting Priorities: A Theory of Covenants and Collateral," 2019 Meeting Papers 157, Society for Economic Dynamics.
    10. Stephens, Eric & Thompson, James R., 2017. "Information asymmetry and risk transfer markets," Journal of Financial Intermediation, Elsevier, vol. 32(C), pages 88-99.
    11. Romans Pancs, 2015. "Efficient dark markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 59(3), pages 605-624, August.
    12. Carlos Corona & Lin Nan & Gaoqing Zhang, 2019. "The Coordination Role of Stress Tests in Bank Risk‐Taking," Journal of Accounting Research, Wiley Blackwell, vol. 57(5), pages 1161-1200, December.
    13. Mitchell Berlin, 2015. "Disclosure of stress test results," Working Papers 15-31, Federal Reserve Bank of Philadelphia.
    14. Itay Goldstein & Yaron Leitner, 2015. "Stress tests and information disclosure," Working Papers 15-10, Federal Reserve Bank of Philadelphia.
    15. Biais, B. & Heider, F. & Hoerova, M., 2013. "Incentive compatible centralised clearing," Financial Stability Review, Banque de France, issue 17, pages 161-168, April.

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