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Benchmarks in Search Markets

Author

Listed:
  • Duffie, Darrell

    (Stanford University)

  • Dworczak, Piotr

    (Stanford University)

  • Zhu, Haoxiang

    (MIT)

Abstract

We analyze the role of benchmarks in over-the-counter markets subject to search frictions. The publication of a benchmark can, under conditions, raise total social surplus by (i) increasing the volume of beneficial trade, (ii) reducing total search costs, and (iii) facilitating more efficient trade matching between dealers and customers. Although the improvement in market transparency caused by benchmarks may lower dealer profit margins on each trade, dealers may nevertheless introduce a benchmark such as LIBOR in order to encourage greater market participation by investors. In some cases, the lowest-cost dealers may introduce a benchmark in order to increase their market share through reducing entry by high-cost dealers, a further source of efficiency gain.

Suggested Citation

  • Duffie, Darrell & Dworczak, Piotr & Zhu, Haoxiang, 2014. "Benchmarks in Search Markets," Research Papers 3190, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3190
    as

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    File URL: http://www.gsb.stanford.edu/faculty-research/working-papers/benchmarks-search-markets
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market 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
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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