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A Search Model of Centralzied and Decentralized Trade

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  • Jianjun Miao

    (Institute for Economic Development, Boston University)

Abstract

This paper presents a search model of centralized and decentralized trade. In a centralized market, trades are intermediated by market makers at publicly posted bid–ask prices. In a decentralized market, traders search counterparties. Prices are negotiated and transactions are conducted in private meetings among traders. Traders can choose which market to enter. The determinants of bid–ask spreads and liquidity are analyzed. The welfare consequence of the market fragmentation is also analyzed. It is shown that compared to the competitive market-making, monopolistic market-making may improve social welfare. ? 2005 Elsevier Inc. All rights reserved.
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Suggested Citation

  • Jianjun Miao, 2005. "A Search Model of Centralzied and Decentralized Trade," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-144, Boston University - Department of Economics.
    • Handle: RePEc:bos:iedwpr:dp-144
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    File URL: http://www.bu.edu/econ/ied/dp/papers/dp144-Miao.pdf
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    Cited by:

    1. Alessandro Gavazza, 2016. "An Empirical Equilibrium Model of a Decentralized Asset Market," Econometrica, Econometric Society, vol. 84, pages 1755-1798, September.
    2. Ricardo Lagos & Guillaume Rocheteau, 2009. "Liquidity in Asset Markets With Search Frictions," Econometrica, Econometric Society, vol. 77(2), pages 403-426, March.
    3. Jérôme Dugast & Semih Üslü & Pierre-Olivier Weill, 2022. "A Theory of Participation in OTC and Centralized Markets [Trade Dynamics in the Market for Federal Funds]," Review of Economic Studies, Oxford University Press, vol. 89(6), pages 3223-3266.
    4. Watanabe Makoto, 2020. "Middlemen: A Directed Search Equilibrium Approach," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(2), pages 1-37, June.
    5. Ricardo Lagos & Guillaume Rocheteau, 2006. "Search in asset markets," Staff Report 375, Federal Reserve Bank of Minneapolis.
    6. Zhifeng Cai & Feng Dong, 2021. "A Model of Secular Migration from Centralized to Decentralized Trade," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 72(1), pages 201-244, July.
    7. Hajime Tomura, 2013. "Repos in Over-the-Counter Markets," UTokyo Price Project Working Paper Series 005, University of Tokyo, Graduate School of Economics.
    8. Jérôme Dugast & Semih Uslu & Pierre-Olivier Weil, 2018. "Platform Trading with an OTC Market Fringe," Post-Print hal-02104107, HAL.
    9. Gara Afonso & Ricardo Lagos, 2015. "Trade Dynamics in the Market for Federal Funds," Econometrica, Econometric Society, vol. 83, pages 263-313, January.
    10. Gerasimos T. Soldatos, 2021. "A model of market competition as a prize contest or a model of strife for market domination," SN Business & Economics, Springer, vol. 1(1), pages 1-9, January.
    11. Guillaume Rocheteau & Pierre‐Olivier Weill, 2011. "Liquidity in Frictional Asset Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s2), pages 261-282, October.
    12. Hajime Tomura, 2016. "Investment Horizon and Repo in the Over‐the‐Counter Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(1), pages 145-164, February.
    13. Pierre-Olivier Weill, 2020. "The search theory of OTC markets," NBER Working Papers 27354, National Bureau of Economic Research, Inc.
    14. José Ramón Martínez-Resano, 2005. "Size and heterogeneity matter. A microstructure-based analysis of regulation of secondary markets for governments bonds," Occasional Papers 0501, Banco de España.
    15. Hajime Tomura, 2012. "On the Existence and Fragility of Repo Markets," Staff Working Papers 12-17, Bank of Canada.
    16. Randall Wright & Yuet‐Yee Wong, 2014. "Buyers, Sellers, And Middlemen: Variations On Search‐Theoretic Themes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(2), pages 375-397, May.
    17. Gara Afonso & Ricardo Lagos, 2015. "The Over‐the‐Counter Theory of the Fed Funds Market: A Primer," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S2), pages 127-154, June.
    18. Nyarko, Yaw & Pellegrina, Heitor S., 2022. "From bilateral trade to centralized markets: A search model for commodity exchanges in Africa," Journal of Development Economics, Elsevier, vol. 157(C).
    19. Wittwer, Milena, 2017. "Centralizing Disconnected Markets? An Irrelevance Result," MPRA Paper 76534, University Library of Munich, Germany.
    20. Hajime Tomura, 2014. "Investment Horizon and Repo in the Over-the-Counter Market," UTokyo Price Project Working Paper Series 026, University of Tokyo, Graduate School of Economics.
    21. Yumi Saita & Chihiro Shimizu & Tsutomu Watanabe, 2013. "Aging and Real Estate Prices:Evidence from Japanese and US Regional Data," UTokyo Price Project Working Paper Series 014, University of Tokyo, Graduate School of Economics, revised Dec 2013.
    22. Shigeru Makioka, 2015. "A search model with match makers," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(2), pages 153-168, October.
    23. Yuet-Yee Wong & Randall Wright, 2011. "Buyers, sellers and middlemen: variations in search theory," Working Papers 691, Federal Reserve Bank of Minneapolis.
    24. Yong Kim, 2009. "Capital Reallocation and Liquidity with Search Frictions," 2009 Meeting Papers 72, Society for Economic Dynamics.
    25. Maria Eugénia Sanin, 2009. "Choosing a trading counterpart in the U.S. acid rain market," Working Papers hal-00437636, HAL.

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    More about this item

    Keywords

    searching; matching and bargaining; bid-ask spread; liquidity; welfare; Walrasian equilibrium;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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