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

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  • Yaron Leitner
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    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 09-10

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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 10-28.

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    Date of creation: 2010
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    Handle: RePEc:fip:fedpwp:10-28

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    Keywords: Contracts ; Asset-liability management ; Clearinghouses (Banking);

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    1. Helmut Bester & Roland Strausz, . "Contracting with Imperfect Commitment and Noisy Communication," Papers 017, Departmental Working Papers.
    2. Brusco, Sandro & Jackson, Matthew O., 1999. "The Optimal Design of a Market," Journal of Economic Theory, Elsevier, vol. 88(1), pages 1-39, September.
    3. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
    4. Helmut Bester & Roland Strausz, . "Imperfect Commitment and the Revelation Principle," Papers 004, Departmental Working Papers.
    5. Alberto Bisin & Adriano Rampini, 2006. "Exclusive contracts and the institution of bankruptcy," Economic Theory, Springer, vol. 27(2), pages 277-304, January.
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