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Intermediating Adverse Selection

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Author Info

  • Vincent Glode

    (Wharton School)

  • Christian Opp

    (University of Pennsylvania)

Abstract

We propose a parsimonious model of over-the-counter trading under asymmetric information to study the presence of intermediary chains that stand between well informed parties and uninformed market participants. Multiple moderately informed intermediaries can fulfill an important economic role of "smoothing" adverse selection. Informed market participants may prefer to trade through these intermediary chains as they improve trade efficiency but also reduce the surplus accruing to uninformed traders. Our model makes novel predictions about optimal network formation when adverse selection problems impede the efficiency of trade.

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File URL: http://www.economicdynamics.org/meetpapers/2013/paper_119.pdf
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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 119.

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Date of creation: 2013
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Handle: RePEc:red:sed013:119

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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