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The Emergence of Market Structure

Listed author(s):
  • Maryam Farboodi
  • Gregor Jarosch
  • Robert Shimer

What market structure emerges when market participants can choose the rate at which they contact others? We show that traders who choose a higher contact rate emerge as intermediaries, earning profits by taking asset positions that are misaligned with their preferences. Some of them, middlemen, are in constant contact with other traders and so pass on their position immediately. As search costs vanish, traders still make dispersed investments and trade occurs in intermediation chains, so the economy does not converge to a centralized market. When search costs are a differentiable function of the contact rate, the endogenous distribution of contact rates has no mass points. When the function is weakly convex, faster traders are misaligned more frequently than slower traders. When the function is linear, the contact rate distribution has a Pareto tail with parameter 2 and middlemen emerge endogenously. These features arise not only in the (inefficient) equilibrium allocation, but also in the optimal allocation. Moreover, we show that intermediation is key to the emergence of the rest of the properties of this market structure.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23234.

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Date of creation: Mar 2017
Handle: RePEc:nbr:nberwo:23234
Note: AP EFG
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  1. Daniel Heller & Nicholas Vause, 2012. "Collateral requirements for mandatory central clearing of over-the-counter derivatives," BIS Working Papers 373, Bank for International Settlements.
  2. 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.
  3. Julien HUGONNIER & Benjamin LESTER & Pierre-Olivier WEILL, "undated". "Heterogeneity in Decentralized Asset Markets," Swiss Finance Institute Research Paper Series 14-67, Swiss Finance Institute.
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