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Inducing agents to report hidden trades: a theory of an intermediary

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Yaron Leitner
Abstract

When contracts are unobserved, agents may have the incentive to promise the same asset to multiple counterparties and subsequently default. The author constructs an optimal mechanism that induces agents to reveal all their trades voluntarily. The mechanism allows agents to report every contract they enter, and it makes public the names of agents who have reached some prespecified position limit. In some cases, an agent's position limit must be higher than the number of contracts he enters in equilibrium. The mechanism has some features of a clearinghouse. ; Supersedes Working Paper 05-12/R

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 09-10.

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Date of creation: 2009
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Handle: RePEc:fip:fedpwp:09-10

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