Working Paper: NBER ID: w10816
Authors: Darrell Duffie; Nicolae Garleanu; Lasse Heje Pedersen
Abstract: We study how intermediation and asset prices in over-the-counter markets are affected by illiquidity associated with search and bargaining. We compute explicitly the prices at which investors trade with each other as well as marketmakers' bid and ask prices in a dynamic model with strategic agents. Bid-ask spreads are lower if investors can more easily find other investors, or have easier access to multiple marketmakers. With a monopolistic marketmaker, bid-ask spreads are higher if investors have easier access to the marketmaker. We characterize endogenous search and welfare, and discuss empirical implications.
Keywords: No keywords provided
JEL Codes: G0; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| search efficiency (G14) | lower bid-ask spreads (G19) |
| monopolistic marketmaker (D42) | higher bid-ask spreads (G19) |
| marketmaker's bargaining power (C78) | price outcomes (P22) |
| marketmaker contact intensity (L14) | competitive prices (D41) |
| marketmaker contact intensity (L14) | vanishing spreads (D52) |
| sophisticated investors (G24) | tighter bid-ask spreads (G19) |
| search capabilities (D83) | bargaining positions (C78) |
| increased search intensity (D83) | more competitive pricing (D49) |