Working Paper: CEPR ID: DP17619
Authors: Hongda Zhong
Abstract: Skilled intermediaries can represent multiple investors, generating economies of scale in screening costs. However, locating competent intermediaries recreates the screening friction. I provide a framework to study the structure of intermediation chain, focusing on its length, sector size, skill distribution, and effort choice. Counterintuitively, efficient intermediation does not rely on intermediaries being more skilled. Longer chains enhance welfare and reduce the market power of the intermediary sector. Moreover, self-selection of intermediaries into two heterogeneous layers can lead to greater efficiency compared to structures with homogeneous qualities across layers. These findings have implications for delegated asset management industry.
Keywords: screening; social media influencers; funds; index; intermediation chain
JEL Codes: D40; G00; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| short two-layer chain (Y60) | efficient intermediation (D61) |
| self-selection of intermediaries (D82) | efficient intermediation (D61) |
| longer chain (Y60) | restore first-best efficiency (D61) |
| skill types unknown (J24) | longer chain restores first-best efficiency (H21) |
| intermediation creates economies of scale (D40) | efficient intermediation (D61) |