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Liquidity risk in sequential trading networks

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  • Kariv, Shachar
  • Kotowski, Maciej H.
  • Leister, C. Matthew

Abstract

This paper studies a model of intermediated exchange with liquidity-constrained traders. Intermediaries are embedded in a trading network and their financial capacities are private information. We characterize our model's monotone, pure-strategy equilibrium. Agents earn positive intermediation rents in equilibrium. An experimental investigation supports the model's baseline predictions concerning agents' strategies, price dynamics, and the division of surplus. While private financial constraints inject uncertainty into the trading environment, our experiment suggests they are also a behavioral speed-bump, preventing traders from experiencing excessive losses due to overbidding.

Suggested Citation

  • Kariv, Shachar & Kotowski, Maciej H. & Leister, C. Matthew, 2018. "Liquidity risk in sequential trading networks," Games and Economic Behavior, Elsevier, vol. 109(C), pages 565-581.
    • Handle: RePEc:eee:gamebe:v:109:y:2018:i:c:p:565-581
    DOI: 10.1016/j.geb.2018.02.004
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    Cited by:

    1. Kotowski, Maciej H., 2020. "First-price auctions with budget constraints," Theoretical Economics, Econometric Society, vol. 15(1), January.
    2. Choi, S. & Goyal, S. & Moisan, F., 2020. "Brokerage Rents and Intermediation Networks," Cambridge Working Papers in Economics 2005, Faculty of Economics, University of Cambridge.
    3. Jinsoo Bae & John H. Kagel, 2022. "Selling shares to budget-constrained bidders: an experimental study of the proportional auction," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 8(1), pages 45-55, December.
    4. Kotowski, Maciej H. & Leister, C. Matthew, 2018. "Trading Networks and Equilibrium Intermediation," Working Paper Series rwp18-001, Harvard University, John F. Kennedy School of Government.
    5. Choi, S. & Goyal, G. & Moisan, F., 2020. "Large Scale Experiments on Networks: A New Platform with Applications," Cambridge Working Papers in Economics 2063, Faculty of Economics, University of Cambridge.

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    More about this item

    Keywords

    Experiment; Economic networks; Intermediation; Liquidity; Auctions; Budget constraints;
    All these keywords.

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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