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A Dynamic Model of Search and Intermediation

Listed author(s):
  • Gautam Bose


    (School of Economics, The University of New South Wales)

  • Abhijit Sengupta


    (Discipline of Economics, University of Sydney)

This paper develops a dynamic model of an economy with search frictions in which homogeneous agents choose between specializing as producers or as merchants, and can change occupation at any time. Merchants operate alongside a decentralized search market and provide immediacy in trade in return for a price. Agents who know the location of a merchant have the option of paying the merchant’s price and avoiding search. We characterize equilibria in symmetric Markov strategies, and derive conditions under which merchants and their clients form a repeated relationship. We analyze welfare and explore conditions for the endogenous rise of an institution of intermediation.

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Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2010-04.

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Length: 35 pages
Date of creation: Feb 2010
Handle: RePEc:swe:wpaper:2010-04
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