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Competition Among Exchanges

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Author Info
Tano Santos
Joséa. Scheinkman

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Abstract

Does competition among financial intermediaries lead to excessively low standards? To examine this question, we construct a model where intermediaries design contracts to attract trading volume, taking into consideration that traders differ in credit quality and may default. When credit quality is observable, intermediaries demand the "right" amount of guarantees. A monopolist would demand fewer guarantees. Private information about credit quality has an ambiguous effect in a competitive environment. When the cost of default is large (small), private information leads to higher (lower) standards. We exhibit examples where private information is present and competition produces higher standards than monopoly does. © 2001 the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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Publisher Info
Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 116 (2001)
Issue (Month): 3 (August)
Pages: 1027-1061
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Handle: RePEc:tpr:qjecon:v:116:y:2001:i:3:p:1027-1061

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bester, Helmut, 1987. "The role of collateral in credit markets with imperfect information," European Economic Review, Elsevier, vol. 31(4), pages 887-899, June. [Downloadable!] (restricted)
  2. Alberto Bisin & Danilo Guaitoli, 1998. "Moral Hazard and Non-Exclusive Contracts," Economics Working Papers 345, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  3. Arnott, R. & Stiglitz, J., 1994. "Price Equilibrium, Efficiency, and Decentralizability in Insurance Markets with Moral Hazard," Papers 05, Laval - Laboratoire Econometrie.
    Other versions:
  4. Bisin, A., 1994. "General Equilibrium and Endogenously Incomplete Financial Markets," DELTA Working Papers 94-20, DELTA (Ecole normale supérieure).
  5. Pradeep Dubey & John Geanakoplos & Martin Shubik, 1988. "Default and Efficiency in a General Equilibrium Model with Incomplete Markets," Cowles Foundation Discussion Papers 879R, Cowles Foundation, Yale University, revised Feb 1989. [Downloadable!]
  6. Franklin Allen, Douglas Gale, 1988. "Optimal Security Design," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 1(3), pages 229-263. [Downloadable!] (restricted)
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  7. Bernanke, Ben S, 1990. "Clearing and Settlement during the Crash," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 3(1), pages 133-51. [Downloadable!] (restricted)
  8. Bizer, David S & DeMarzo, Peter M, 1992. "Sequential Banking," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 41-61, February. [Downloadable!] (restricted)
  9. Allen, Franklin & Gale, Douglas, 1991. "Arbitrage, Short Sales, and Financial Innovation," Econometrica, Econometric Society, vol. 59(4), pages 1041-68, July. [Downloadable!] (restricted)
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  10. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 393-414, July. [Downloadable!] (restricted)
  11. Bisin, Alberto & Gottardi, Piero, 1997. "General Competitive Analysis with Asymmetric Information," Working Papers 97-38, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  12. Chassagnon, A. & Chiappori, P.A., 1994. "Insurance Under Moral Hazard and Adverse Selection: The Case of Pure Competition," Papers 28, Laval - Laboratoire Econometrie.
  13. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Yaron Leitner, 2005. "A theory of an intermediary with nonexclusive contracting," Working Papers 05-12, Federal Reserve Bank of Philadelphia. [Downloadable!]
  2. Alexandre Gaudeul, 2004. "Internet Intermediaries' Editorial Content Quality," Industrial Organization 0409005, EconWPA. [Downloadable!]
  3. Tano Santos & Jose A. Scheinkman, 2001. "Financial Intermediation without Exclusivity," American Economic Review, American Economic Association, vol. 91(2), pages 436-439, May. [Downloadable!] (restricted)
  4. Jens Nystedt, 2004. "Derivative Market Competition: OTC Versus Organized Derivative Exchanges," IMF Working Papers 04/61, International Monetary Fund. [Downloadable!]
  5. Thorsten Koeppl & Cyril Monnet, 2005. "Guess what: It's the Settlements!," Working Papers 1051, Queen's University, Department of Economics. [Downloadable!]
    Other versions:
  6. Hans Degryse & Mark Van Achter & Gunther Wuyts, 2007. "Dynamic order submission strategies with competition between a dealer market and a crossing network," Research series 200712-15, National Bank of Belgium. [Downloadable!]
    Other versions:
  7. Yaron Leitner, 2004. "Non-Exclusive Contracts, Collateralized Trade, and a Theory of an Exchange," Econometric Society 2004 North American Winter Meetings 397, Econometric Society. [Downloadable!]
  8. Yaron Leitner, 2003. "Non-exclusive contracts, collateralized trade, and a theory of an exchange," Working Papers 03-3, Federal Reserve Bank of Philadelphia. [Downloadable!]
  9. Randall S. Kroszner, 2000. "The supply of and demand for financial regulation : public and private competition around the globe : commentary," Proceedings, Federal Reserve Bank of Kansas City, pages 137-149. [Downloadable!]
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