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On the efficiency of long intermediation chains

Author

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  • Glode, Vincent
  • Opp, Christian C.
  • Zhang, Xingtan
Abstract
Intermediation chains represent a common pattern of trade in over-the-counter markets. We study a classic problem impeding trade in these markets: an agent uses his market power to inefficiently screen a privately informed counterparty. We show that, generically, if efficient trade is implementable via any incentive-compatible mechanism, it is also implementable via a trading network that takes the form of a sufficiently long intermediation chain. We characterize information sets of intermediaries that ensure this striking result. Sparse trading networks featuring long intermediation chains might thus constitute an efficient market response to frictions, in which case no regulatory action is warranted.

Suggested Citation

  • Glode, Vincent & Opp, Christian C. & Zhang, Xingtan, 2019. "On the efficiency of long intermediation chains," Journal of Financial Intermediation, Elsevier, vol. 38(C), pages 11-18.
    • Handle: RePEc:eee:jfinin:v:38:y:2019:i:c:p:11-18
    DOI: 10.1016/j.jfi.2017.08.006
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    Citations

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    Cited by:

    1. Jean-Edouard Colliard & Gabrielle Demange, 2021. "Asset Dissemination Through Dealer Markets," Management Science, INFORMS, vol. 67(10), pages 6211-6234, October.
    2. Chalmers, John & Liu, Yu (Steve) & Wang, Z. Jay, 2021. "The difference a day makes: Timely disclosure and trading efficiency in the muni market," Journal of Financial Economics, Elsevier, vol. 139(1), pages 313-335.
    3. Pinter, Gabor & Uslu, Semih, 2023. "Price formation in markets with trading delays," Bank of England working papers 1023, Bank of England.
    4. Li, Yunan & Zhang, Xingtan, 2024. "Collective decision through an informed mediator," Journal of Economic Theory, Elsevier, vol. 218(C).
    5. Dasgupta, Amil & Maug, Ernst, 2022. "Delegation chains," LSE Research Online Documents on Economics 118852, London School of Economics and Political Science, LSE Library.

    More about this item

    Keywords

    Intermediation Chains; Monopoly Power; Asymmetric Information; Over-the-Counter Trading Networks;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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