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Intermediaries as Information Aggregators

Author

Listed:
  • Laura Veldkamp

    (NYU Stern)

  • David Lucca

    (Federal Reserve Bank of New York)

  • Nina Boyarchenko

    (Federal Reserve Bank of New York)

Abstract

In most theories of financial intermediation, the intermediaries diversify risk, transform maturity or liquidity, or screen/monitor borrowers. But in U.S. Treasury auctions, none of these rationales apply: Investors can bid directly, assets are highly liquid, dealers do not discipline, screen or diversify fiscal policy risk. Yet, most bids are still intermediated. Motivated by treasury auctions, we explore a new information aggregation theory of intermediaries who observe the order-flow of each client and use that aggregated information to advise all clients. In contrast to underwriting theories where intermediaries extract rents, but reduce revenue variance, information aggregators do the opposite: They increase expected auction revenue, but also make the revenue more sensitive to changes in asset value. We use the model to examine current policy questions, such as the optimal number of intermediaries, the effect of non-intermediated bids and minimum bidding requirements.

Suggested Citation

  • Laura Veldkamp & David Lucca & Nina Boyarchenko, 2015. "Intermediaries as Information Aggregators," 2015 Meeting Papers 236, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:236
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    File URL: https://economicdynamics.org/meetpapers/2015/paper_236.pdf
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    References listed on IDEAS

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    1. Dong Lou & Hongjun Yan & Jinfan Zhang, 2013. "Anticipated and Repeated Shocks in Liquid Markets," Review of Financial Studies, Society for Financial Studies, vol. 26(8), pages 1891-1912.
    2. Erwann SbaÏ & Olivier Armantier, 2006. "Estimation and comparison of treasury auction formats when bidders are asymmetric," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(6), pages 745-779.
    3. Ali Hortaçsu & David McAdams, 2010. "Mechanism Choice and Strategic Bidding in Divisible Good Auctions: An Empirical Analysis of the Turkish Treasury Auction Market," Journal of Political Economy, University of Chicago Press, vol. 118(5), pages 833-865.
    4. Lawrence M. Ausubel, 2004. "An Efficient Ascending-Bid Auction for Multiple Objects," American Economic Review, American Economic Association, vol. 94(5), pages 1452-1475, December.
    5. Back, Kerry & Zender, Jaime F, 1993. "Auctions of Divisible Goods: On the Rationale for the Treasury Experiment," Review of Financial Studies, Society for Financial Studies, vol. 6(4), pages 733-764.
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    Cited by:

    1. Manzano, Carolina & Vives, Xavier, 2016. "Market Power and Welfare in Asymmetric Divisible Good Auctions," CEPR Discussion Papers 11731, C.E.P.R. Discussion Papers.

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