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More on Middlemen: Equilibrium Entry and Efficiency in Intermediated Markets

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  • ED NOSAL
  • YUET‐YEE WONG
  • RANDALL WRIGHT

Abstract

This paper generalizes Rubinstein and Wolinsky's (1987) model of middlemen (intermediation) by incorporating production and search costs, plus more general matching and bargaining. This allows us to study many new issues, including entry, efficiency, and dynamics. In the benchmark model, equilibrium exists uniquely and involves production and intermediation for some parameters but not others. Sometimes intermediation is essential: the market operates if and only if middlemen are active. If bargaining powers are set correctly equilibrium is efficient; if not there can be too much or too little economic activity. This is novel, compared to the original Rubinstein–Wolinsky model, where equilibrium is always efficient.

Suggested Citation

  • Ed Nosal & Yuet‐Yee Wong & Randall Wright, 2015. "More on Middlemen: Equilibrium Entry and Efficiency in Intermediated Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S2), pages 7-37, June.
    • Handle: RePEc:wly:jmoncb:v:47:y:2015:i:s2:p:7-37
    DOI: 10.1111/jmcb.12213
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    Cited by:

    1. Pieter Gautier & Bo Hu & Makoto Watanabe, 2023. "Marketmaking Middlemen," RAND Journal of Economics, RAND Corporation, vol. 54(1), pages 83-103, March.
    2. Guillaume Rocheteau & Randall Wright & Cathy Zhang, 2018. "Corporate Finance and Monetary Policy," American Economic Review, American Economic Association, vol. 108(4-5), pages 1147-1186, April.
    3. Maryam Farboodi & Gregor Jarosch & Guido Menzio, 2016. "Intermediation as Rent Extraction," PIER Working Paper Archive 16-026, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 01 Dec 2016.
    4. Zachary Bethune & Bruno Sultanum & Nicholas Trachter, 2019. "Asset Issuance in Over-the-Counter Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 4-29, July.
    5. Chao Gu & Cyril Monnet & Ed Nosal & Randall Wright, 2019. "On the Instability of Banking and Financial Intermediation," Working Papers 1901, Department of Economics, University of Missouri.
    6. Lars Boerner & Daniel Quint, 2023. "Medieval Matching Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(1), pages 23-56, February.
    7. Gary Biglaiser & Fei Li & Charles Murry & Yiyi Zhou, 2020. "Intermediaries and product quality in used car markets," RAND Journal of Economics, RAND Corporation, vol. 51(3), pages 905-933, September.
    8. Zachary Bethune & Bruno Sultanum & Nicholas Trachter, 2022. "An Information-based Theory of Financial Intermediation [Trade Dynamics in the Market for Federal Funds]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(5), pages 2381-2444.
    9. Rafael Silveira & Randall Wright, 2016. "Venture Capital: A Model of Search and Bargaining," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 19, pages 232-246, January.
    10. Gu, Chao & Monnet, Cyril & Nosal, Ed & Wright, Randall, 2023. "Diamond–Dybvig and beyond: On the instability of banking," European Economic Review, Elsevier, vol. 154(C).
    11. Chao Gu & Fabrizio Mattesini & Randall Wright, 2016. "Money and Credit Redux," Econometrica, Econometric Society, vol. 84, pages 1-32, January.
    12. Shen, Ji & Wei, Bin & Yan, Hongjun, 2016. "Financial Intermediation Chains in an OTC Market," MPRA Paper 74925, University Library of Munich, Germany.
    13. Nosal, Ed & Wong, Yuet-Yee & Wright, Randall, 2019. "Intermediation in markets for goods and markets for assets," Journal of Economic Theory, Elsevier, vol. 183(C), pages 876-906.
    14. Ji Shen & Bin Wei & Hongjun Yan, 2021. "Financial Intermediation Chains in an Over-the-Counter Market," Management Science, INFORMS, vol. 67(7), pages 4623-4642, July.

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    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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