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A theory of an intermediary with nonexclusive contracting

  • Yaron Leitner
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    This paper addresses large markets where agents cannot commit to sign exclusive contracts may induce agents to promise the same asset to multiple counterparties and subsequently default. Is how that in such markets an intermediary can increase welfare by simply setting limits on the number of contracts that agents can report to it voluntarily. In some cases, these limits must be nonbinding in equilibrium, and reported trades must not be made public. The theory shows why an exchange may be valuable even when markets are liquid. It also suggests why in some cases a regulator should not reveal information it collects from banks. ; Superseded by Working Paper 10-28

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    File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/2010/wp10-28R.pdf
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    Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 05-12.

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    Date of creation: 2005
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    Handle: RePEc:fip:fedpwp:05-12
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    1. Holmstrom, B & Tirole, J, 1996. "Private and Public Supply of Liquidity," Working papers 96-21, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Tano Santos & Joséa. Scheinkman, 2001. "Competition Among Exchanges," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 1027-1061, August.
    3. Alberto Bisin & Danilo Guaitoli, 2004. "Moral Hazard and Nonexclusive Contracts," RAND Journal of Economics, The RAND Corporation, vol. 35(2), pages 306-328, Summer.
    4. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
    5. Kathleen Hagerty & Robert L. McDonald, 1996. "Brokerage, Market Fragmentation, and Securities Market Regulation," NBER Chapters, in: The Industrial Organization and Regulation of the Securities Industry, pages 35-62 National Bureau of Economic Research, Inc.
    6. Alberto Bisin & Adriano Rampini, 2006. "Exclusive contracts and the institution of bankruptcy," Economic Theory, Springer, vol. 27(2), pages 277-304, January.
    7. Stewart C. Myers & Raghuram G. Rajan, 1998. "The Paradox of Liquidity," CRSP working papers 339, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    8. Matthew O. Jackson & Sandro Brusco, 1997. "The Optimal Design of a Market," Discussion Papers 1186, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    9. Pagano, Marco & Roell, Ailsa, 1996. " Transparency and Liquidity: A Comparison of Auction and Dealer Markets with Informed Trading," Journal of Finance, American Finance Association, vol. 51(2), pages 579-611, June.
    10. Brennan, Michael J., 1986. "A theory of price limits in futures markets," Journal of Financial Economics, Elsevier, vol. 16(2), pages 213-233, June.
    11. Christine A. Parlour & Uday Rajan, 2001. "Competition in Loan Contracts," American Economic Review, American Economic Association, vol. 91(5), pages 1311-1328, December.
    12. Charles M. Kahn & Dilip Mookherjee, 1998. "Competition and Incentives with Nonexclusive Contracts," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 443-465, Autumn.
    13. Bloomfield, Robert & O'Hara, Maureen, 1999. "Market Transparency: Who Wins and Who Loses?," Review of Financial Studies, Society for Financial Studies, vol. 12(1), pages 5-35.
    14. Bizer, David S & DeMarzo, Peter M, 1992. "Sequential Banking," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 41-61, February.
    15. Glosten, Lawrence R, 1994. " Is the Electronic Open Limit Order Book Inevitable?," Journal of Finance, American Finance Association, vol. 49(4), pages 1127-61, September.
    16. Townsend, Robert M, 1978. "Intermediation with Costly Bilateral Exchange," Review of Economic Studies, Wiley Blackwell, vol. 45(3), pages 417-25, October.
    17. Seppi, Duane J, 1997. "Liquidity Provision with Limit Orders and a Strategic Specialist," Review of Financial Studies, Society for Financial Studies, vol. 10(1), pages 103-50.
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