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Exclusive Intermediation

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  • Itay Fainmesser

Abstract

In this paper, we argue that an important function fulfilled by intermediaries is to facilitate trust by enabling social pressure towards the enforcement of informal agreements. To that end, we develop a new model that uses network theory to show that intermediaries who have exclusivity over a large enough number of interaction opportunities are able to exploit their position in the chains of interactions in the market to overcome incentive problems that would otherwise shut down the market. We derive conditions on the network structure under which intermediaries fulfill this function. Finally, we analyze two applications: (1) the market for short termapartment rentals; and (2) a financial market with investors and entrepreneurs. We provide additional examples suggesting that this paper uncovers an important channel through which intermediaries operate.

Suggested Citation

  • Itay Fainmesser, 2014. "Exclusive Intermediation," Working Papers 2014-3, Brown University, Department of Economics.
  • Handle: RePEc:bro:econwp:2014-3
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    References listed on IDEAS

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    1. Glenn Ellison, 1994. "Cooperation in the Prisoner's Dilemma with Anonymous Random Matching," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 567-588.
    2. Dean Karlan & Markus Mobius & Tanya Rosenblat & Adam Szeidl, 2009. "Trust and Social Collateral," The Quarterly Journal of Economics, Oxford University Press, vol. 124(3), pages 1307-1361.
    3. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, January.
    4. Matthew O. Jackson & Tomas Rodriguez-Barraquer & Xu Tan, 2012. "Social Capital and Social Quilts: Network Patterns of Favor Exchange," American Economic Review, American Economic Association, vol. 102(5), pages 1857-1897, August.
    5. Oliver Hart & John Moore, 1998. "Default and Renegotiation: A Dynamic Model of Debt," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 1-41.
    6. Itay P. Fainmesser, 2012. "Community Structure and Market Outcomes: A Repeated Games-in-Networks Approach," American Economic Journal: Microeconomics, American Economic Association, vol. 4(1), pages 32-69, February.
    7. Mihm, Maximilian & Toth, Russell & Lang, Corey, 2009. "What Goes Around Comes Around: A Theory of Indirect Reciprocity in Networks," Working Papers 09-07, Cornell University, Center for Analytic Economics.
    8. Hall, Bronwyn H. & Lerner, Josh, 2010. "The Financing of R&D and Innovation," Handbook of the Economics of Innovation, Elsevier.
    9. Kaivan Munshi, 2011. "Strength in Numbers: Networks as a Solution to Occupational Traps," Review of Economic Studies, Oxford University Press, vol. 78(3), pages 1069-1101.
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    Cited by:

    1. Emily Breza & Arun G. Chandrasekhar & Horacio Larreguy, 2014. "Social Structure and Institutional Design: Evidence from a Lab Experiment in the Field," NBER Working Papers 20309, National Bureau of Economic Research, Inc.
    2. Babus, Ana & Hu, Tai-Wei, 2017. "Endogenous intermediation in over-the-counter markets," Journal of Financial Economics, Elsevier, vol. 125(1), pages 200-215.

    More about this item

    Keywords

    Networks; intermediation; long-term relationships; self-governance; community enforcement; trust; social capital; cooperation; strategic default; financial intermediation; Airbnb.com;

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