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Non-exclusive contracts, collateralized trade, and a theory of an exchange

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  • Yaron Leitner
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    Abstract

    Liquid markets where agents have limited capacity to sign exclusive contracts may permit agents to promise the same asset to multiple counterparties and subsequently default. I show that in such markets an exchange can arise as an intermediary whose only role is to set limits on the number of contracts that agents can report voluntarily. In some cases, these limits must be non-binding in equilibrium, and reported trades must not be made public. A (costly) alternative to an exchange is collateralized trade, and the gains from an exchange increase when agents have more intangible capital (e.g., reputation) or when markets are more liquid. ; Superseded by Working Paper 10-28R: Inducing agents to report hidden trades: a theory of an intermediary.

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    File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/2010/wp10-28R.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 03-3.

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    Date of creation: 2003
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    Handle: RePEc:fip:fedpwp:03-3

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    Keywords: Contracts ; Trade;

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    1. Bengt Holmstrom & Jean Tirole, 1996. "Private and Public Supply of Liquidity," NBER Working Papers 5817, National Bureau of Economic Research, Inc.
    2. Tano Santos & Joséa. Scheinkman, 2001. "Competition Among Exchanges," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 1027-1061, August.
    3. Pagano, Marco & Roell, Ailsa, 1996. " Transparency and Liquidity: A Comparison of Auction and Dealer Markets with Informed Trading," Journal of Finance, American Finance Association, vol. 51(2), pages 579-611, June.
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    8. Alberto Bisin & Adriano Rampini, 2006. "Exclusive contracts and the institution of bankruptcy," Economic Theory, Springer, vol. 27(2), pages 277-304, January.
    9. Herbert L. Baer & Virginia G. France & James T. Moser, 2001. "Opportunity cost and prudentiality: an analysis of collateral decisions in bilateral and multilateral settings," Working Paper Series WP-01-26, Federal Reserve Bank of Chicago.
    10. Charles M. Kahn & Dilip Mookherjee, 1998. "Competition and Incentives with Nonexclusive Contracts," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 443-465, Autumn.
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    13. Seppi, Duane J, 1997. "Liquidity Provision with Limit Orders and a Strategic Specialist," Review of Financial Studies, Society for Financial Studies, vol. 10(1), pages 103-50.
    14. Sandro Brusco & Matthew O. Jackson, 1997. "The Optimal Design of a Market," Microeconomics 9711003, EconWPA.
    15. Christine A. Parlour & Uday Rajan, 2001. "Competition in Loan Contracts," American Economic Review, American Economic Association, vol. 91(5), pages 1311-1328, December.
    16. Townsend, Robert M, 1978. "Intermediation with Costly Bilateral Exchange," Review of Economic Studies, Wiley Blackwell, vol. 45(3), pages 417-25, October.
    17. 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.
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