IDEAS home Printed from https://ideas.repec.org/a/aea/aecrev/v106y2016i9p2699-2721.html
   My bibliography  Save this article

Asymmetric Information and Intermediation Chains

Author

Listed:
  • Vincent Glode
  • Christian Opp

Abstract

We propose a parsimonious model of bilateral trade under asymmetric information to shed light on the prevalence of intermediation chains that stand between buyers and sellers in many decentralized markets. Our model features a classic problem in economics where an agent uses his market power to inefficiently screen a privately informed counterparty. Paradoxically, involving moderately informed intermediaries also endowed with market power can improve trade efficiency. Long intermediation chains in which each trader's information set is similar to those of his direct counterparties limit traders' incentives to post prices that reduce trade volume and jeopardize gains to trade.

Suggested Citation

  • Vincent Glode & Christian Opp, 2016. "Asymmetric Information and Intermediation Chains," American Economic Review, American Economic Association, vol. 106(9), pages 2699-2721, September.
    • Handle: RePEc:aea:aecrev:v:106:y:2016:i:9:p:2699-2721
    Note: DOI: 10.1257/aer.20140662
    as

    Download full text from publisher

    File URL: https://www.aeaweb.org/articles?id=10.1257/aer.20140662
    Download Restriction: no
    File URL: https://www.aeaweb.org/articles/attachments?retrieve=qc1vyfabnMWRy4aAZv8rCnTtZvKUPjLy
    Download Restriction: no
    File URL: https://www.aeaweb.org/articles/attachments?retrieve=6FVFLjQVKHP1wQbyKeJAj997YKXTvH-z
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    ---><---

    References listed on IDEAS

    as
    1. Nimalendran, M. & Ritter, Jay R. & Zhang, Donghang, 2007. "Do today's trades affect tomorrow's IPO allocations?," Journal of Financial Economics, Elsevier, vol. 84(1), pages 87-109, April.
    2. Bruno Biais & David Martimort & Jean‐Charles Rochet, 2013. "Corrigendum to "Competing Mechanisms in a Common Value Environment"," Econometrica, Econometric Society, vol. 81(1), pages 393-406, January.
    3. Jonathan Reuter, 2006. "Are IPO Allocations for Sale? Evidence from Mutual Funds," Journal of Finance, American Finance Association, vol. 61(5), pages 2289-2324, October.
    4. Bruno Biais & David Martimort & Jean-Charles Rochet, 2000. "Competing Mechanisms in a Common Value Environment," Econometrica, Econometric Society, vol. 68(4), pages 799-838, July.
    5. Nicola Cetorelli & Benjamin H. Mandel & Lindsay Mollineaux, 2012. "The evolution of banks and financial intermediation: framing the analysis," Economic Policy Review, Federal Reserve Bank of New York, vol. 18(Jul), pages 1-12.
    6. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
    7. Easley, David & Kiefer, Nicholas M & O'Hara, Maureen, 1996. "Cream-Skimming or Profit-Sharing? The Curious Role of Purchased Order Flow," Journal of Finance, American Finance Association, vol. 51(3), pages 811-833, July.
    8. Seppi, Duane J, 1990. "Equilibrium Block Trading and Asymmetric Information," Journal of Finance, American Finance Association, vol. 45(1), pages 73-94, March.
    9. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    10. Robert M. Townsend, 1978. "Intermediation with Costly Bilateral Exchange," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(3), pages 417-425.
    11. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    12. Chordia, Tarun & Subrahmanyam, Avanidhar, 1995. "Market Making, the Tick Size, and Payment-for-Order Flow: Theory and Evidence," The Journal of Business, University of Chicago Press, vol. 68(4), pages 543-575, October.
    13. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58(4), pages 347-347.
    14. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-1257, November.
    15. Darrell Duffie, 2012. "Dark Markets: Asset Pricing and Information Transmission in Over-the-Counter Markets," Economics Books, Princeton University Press, edition 1, number 9623.
    16. Marco Di Maggio & Amir Kermani & Zhaogang Song, 2016. "The Value of Trading Relationships in Turbulent Times," NBER Working Papers 22332, National Bureau of Economic Research, Inc.
    17. Maryam Farboodi, 2014. "Intermediation and Voluntary Exposure to Counterparty Risk," 2014 Meeting Papers 365, Society for Economic Dynamics.
    18. Li, Yiting, 1998. "Middlemen and private information," Journal of Monetary Economics, Elsevier, vol. 42(1), pages 131-159, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Biais, Bruno & Glosten, Larry & Spatt, Chester, 2005. "Market microstructure: A survey of microfoundations, empirical results, and policy implications," Journal of Financial Markets, Elsevier, vol. 8(2), pages 217-264, May.
    2. Ahmad Peivandi & Rakesh V. Vohra, 2021. "Instability of Centralized Markets," Econometrica, Econometric Society, vol. 89(1), pages 163-179, January.
    3. Suchismita Mishra & Le Zhao, 2021. "Order Routing Decisions for a Fragmented Market: A Review," JRFM, MDPI, vol. 14(11), pages 1-32, November.
    4. Klein, Peter G. & Wuebker, Robert & Zoeller, Kathrin, 2016. "Relationship banking and conflicts of interest: Evidence from German initial public offerings," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 210-221.
    5. Andrea Attar & Thomas Mariotti & François Salanié, 2021. "Entry-Proofness and Discriminatory Pricing under Adverse Selection," American Economic Review, American Economic Association, vol. 111(8), pages 2623-2659, August.
    6. Attar, Andrea & Mariotti, Thomas & Salanié, François, 2019. "On competitive nonlinear pricing," Theoretical Economics, Econometric Society, vol. 14(1), January.
    7. Hong Liu & Yajun Wang, 2019. "Asset Pricing Implications of Short-Sale Constraints in Imperfectly Competitive Markets," Management Science, INFORMS, vol. 65(9), pages 4422-4439, September.
    8. Bruno Biais & Thomas Mariotti, 2005. "Strategic Liquidity Supply and Security Design," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 615-649.
    9. Jullien, B. & Mariotti, T., 2006. "Auction and the informed seller problem," Games and Economic Behavior, Elsevier, vol. 56(2), pages 225-258, August.
    10. Barney Hartman‐Glaser & Benjamin Hébert, 2020. "The Insurance Is the Lemon: Failing to Index Contracts," Journal of Finance, American Finance Association, vol. 75(1), pages 463-506, February.
    11. Adriani, Fabrizio & Deidda, Luca & Sonderegger, Silvia, 2009. "The Role of Financial Intermediaries in Securities Issues: A Theoretical Analysis," MPRA Paper 16112, University Library of Munich, Germany.
    12. van Kervel, V.L., 2013. "Competition between stock exchanges and optimal trading," Other publications TiSEM 5c608a0f-527d-441d-a910-e, Tilburg University, School of Economics and Management.
    13. Andrea Attar & Thomas Mariotti & François Salanié, 2011. "Nonexclusive Competition in the Market for Lemons," Econometrica, Econometric Society, vol. 79(6), pages 1869-1918, November.
    14. Seyed Mohammadreza Davoodalhosseini, 2020. "Adverse Selection With Heterogeneously Informed Agents," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(3), pages 1307-1358, August.
    15. Attar, Andrea & Mariotti, Thomas & Salanié, François, 2014. "Multiple Contracting in Insurance Markets," TSE Working Papers 14-532, Toulouse School of Economics (TSE), revised Sep 2016.
    16. Khalil, Fahad & Martimort, David & Parigi, Bruno, 2007. "Monitoring a common agent: Implications for financial contracting," Journal of Economic Theory, Elsevier, vol. 135(1), pages 35-67, July.
    17. Jean Tirole, 2012. "Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning," American Economic Review, American Economic Association, vol. 102(1), pages 29-59, February.
    18. Laurence Ales, 2009. "Adverse Selection and Non-exclusive Contracts," 2009 Meeting Papers 854, Society for Economic Dynamics.
    19. Olivier Compte & Philippe Jehiel, 2009. "Veto Constraint in Mechanism Design: Inefficiency with Correlated Types," American Economic Journal: Microeconomics, American Economic Association, vol. 1(1), pages 182-206, February.
    20. George J. Mailath & Georg Nöldeke, 2006. "Extreme Adverse Selection, Competitive Pricing, and Market Breakdown," Levine's Bibliography 321307000000000267, UCLA Department of Economics.

    More about this item

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:106:y:2016:i:9:p:2699-2721. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.