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Intermediation as Rent Extraction

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  • Maryam Farboodi
  • Gregor Jarosch
  • Guido Menzio

Abstract

We propose a theory of intermediation as rent extraction, and explore its implications for the extent of intermediation, welfare and policy. A frictional asset market is populated by agents who are heterogeneous with respect to their bargaining skills, as some can commit to take-it-or-leave-it offers and others cannot. In equilibrium, agents with commitment power act as intermediaries and those without act as final users. Agents with commitment trade on behalf of agents without commitment to extract more rents from third parties. If agents can invest in a commitment technology, there are multiple equilibria differing in the fraction of intermediaries. Equilibria with more intermediaries have lower welfare and any equilibrium with intermediation is inefficient. Intermediation grows as trading frictions become small and during times when interest rates are low. A simple transaction tax can restore efficiency by eliminating any scope for bargaining.

Suggested Citation

  • Maryam Farboodi & Gregor Jarosch & Guido Menzio, 2017. "Intermediation as Rent Extraction," NBER Working Papers 24171, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24171
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    Cited by:

    1. Javier Donna & Andre Trindade & Pedro Pereira & Tiago Pires, 2018. "Measuring the Welfare of Intermediation in Vertical Markets," 2018 Meeting Papers 984, Society for Economic Dynamics.
    2. Jérôme Dugast & Semih Uslu & Pierre-Olivier Weil, 2018. "Platform Trading with an OTC Market Fringe," Post-Print hal-02104107, HAL.
    3. Zachary Bethune & Bruno Sultanum & Nicholas Trachter, 2019. "Asset Issuance in Over-the-Counter Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 4-29, July.
    4. Zachary Bethune & Bruno Sultanum & Nicholas Trachter, 2019. "An Information-based Theory of Financial Intermediation," 2019 Meeting Papers 403, Society for Economic Dynamics.
    5. Donna, Javier D. & Pereira, Pedro & Pires, Tiago & Trindade, Andre, 2018. "Measuring the Welfare of Intermediaries in Vertical Markets," MPRA Paper 90465, University Library of Munich, Germany.
    6. Miroslav Gabrovski & Ioannis Kospentaris, 2020. "Intermediation in Over-the-Counter Markets with Price Transparency," Working Papers 202017, University of Hawaii at Manoa, Department of Economics.

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    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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