Working Paper: CEPR ID: DP8059
Authors: Gianni De Fraja; József Skovics
Abstract: In many decentralised markets, the traders who benefit most from an exchange do not employ intermediaries even though they could easily afford them. At the same time, employing intermediaries is not worthwhile for traders who benefit little from trade. Together, these decisions amount to non-monotone participation choices in intermediation: only traders of middle ``type'' employ intermediaries, while the rest, the high and the low types, prefer to search for a trading partner directly. We provide a theoretical foundation for this, hitherto unexplained, phenomenon. We build a dynamic matching model, where a trader's equilibrium bargaining share is a convex increasing function of their types. We also show that this is indeed necessary condition for the existence of non-monotone equilibria.
Keywords: dynamic matching; intermediation; two-sided markets
JEL Codes: C78; D40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high-quality traders (L15) | trade directly (F10) |
| medium-quality traders (F19) | use intermediaries (L14) |
| traders' types (F19) | bargaining shares (C79) |
| bargaining shares increasing in type (C79) | sandwich equilibrium (D50) |
| constant continuation value (C29) | no sandwich equilibria (D59) |