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An Information-based Theory of Financial Intermediation

Author

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  • Zachary Bethune
  • Bruno Sultanum
  • Nicholas Trachter

Abstract

We build a theory of financial intermediation based on the premise that some investors are better able to figure out the trade motives of their counterparties in bilateral meetings—screening experts. We solve for the equilibrium market structure and study how information asymmetries stemming from heterogeneity in screening expertise shape up the core–periphery trade structure. In particular, the core of the market is populated by screening experts: they have the largest share of trade volume, they are actively engaged in middleman activity, and trade with the most counterparties. Using transaction-level micro-data and information disclosure requirements, we provide extensive evidence consistent only with our theory of financial intermediation.

Suggested Citation

  • Zachary Bethune & Bruno Sultanum & Nicholas Trachter, 2022. "An Information-based Theory of Financial Intermediation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(5), pages 2381-2444.
    • Handle: RePEc:oup:restud:v:89:y:2022:i:5:p:2381-2444.
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    File URL: http://hdl.handle.net/10.1093/restud/rdab092
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    Cited by:

    1. Lester, Benjamin & Weill, Pierre-Olivier & Hugonnier, Julien, 2022. "Heterogeneity in decentralized asset markets," Theoretical Economics, Econometric Society, vol. 17(3), July.
    2. Weill, Pierre-Olivier, 2020. "The search theory of OTC markets," CEPR Discussion Papers 14847, C.E.P.R. Discussion Papers.
    3. Jérôme Dugast & Semih Üslü & Pierre-Olivier Weill, 2022. "A Theory of Participation in OTC and Centralized Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(6), pages 3223-3266.
    4. Justice Iddrisu Lambon & Evans O. N. D. Ocansey, PhD & Opoku Kwaku Ababio, PhD, 2025. "Influence of Employment on Economic Growth in Sub-Saharan Africa. Does Financial Stability Matter?," International Journal of Finance, CARI Journals Limited, vol. 10(5), pages 34-51.
    5. Lucas Dyskant & Andre C. Siva & Bruno Sultanum, 2025. "Trading choices," Nova SBE Working Paper Series wp675, Universidade Nova de Lisboa, Nova School of Business and Economics.
    6. Gabrovski, Miroslav & Kospentaris, Ioannis, 2021. "Intermediation in over-the-counter markets with price transparency," Journal of Economic Theory, Elsevier, vol. 198(C).
    7. Lester, Benjamin & Shourideh, Ali & Venkateswaran, Venky & Zetlin-Jones, Ariel, 2023. "Market-making with search and information frictions," Journal of Economic Theory, Elsevier, vol. 212(C).
    8. Farboodi, Maryam & Jarosch, Gregor & Menzio, Guido & Wiriadinata, Ursula, 2025. "Intermediation as rent extraction," Journal of Economic Theory, Elsevier, vol. 227(C).
    9. Javier A. Birchenall, 2025. "Plague and prejudice: disease, discrimination, and social exclusion," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 80(1), pages 381-415, August.
    10. Cohen, Assa & Kargar, Mahyar & Lester, Benjamin & Weill, Pierre-Olivier, 2024. "Inventory, market making, and liquidity in OTC markets," Journal of Economic Theory, Elsevier, vol. 222(C).

    More about this item

    Keywords

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    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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