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Cream Skimming in Financial MarketsPatrick BoltonColumbia Business School - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI) Tano SantosColumbia Business School; National Bureau of Economic Research (NBER) Jose A. ScheinkmanPrinceton University - Department of Economics; National Bureau of Economic Research (NBER) February 25, 2011 Abstract: We propose a model where agents choose to become entrepreneurs or informed dealers in financial markets. Agents incur costs to become dealers and develop skills for valuing assets. The financial sector comprises a transparent exchange, where uninformed agents trade, and an opaque over-the-counter (OTC) market, where dealers offer attractive terms for the best assets. Dealers provide incentives for entrepreneurs to originate good assets, but the opaqueness of the OTC market allows dealers to extract rents. By siphoning out good assets, the OTC market lowers the quality of assets in the exchange. In equilibrium, dealers’ rents are excessive and attract too much talent to Finance.
Number of Pages in PDF File: 54 JEL Classification: G10, G14 working papers seriesDate posted: February 28, 2011 ; Last revised: June 15, 2012Suggested CitationContact Information
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