Abstract

http://ssrn.com/abstract=2232942
 
 

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Adverse Selection and Intermediation Chains


Vincent Glode


University of Pennsylvania - The Wharton School

Christian C. Opp


University of Pennsylvania - The Wharton School

May 16, 2014


Abstract:     
We propose a parsimonious model of over-the-counter trading with asymmetric information to rationalize the existence of intermediation chains that stand between buyers and sellers of assets. Trading an asset through several heterogeneously informed intermediaries can preserve the efficiency of trade by reallocating an information asymmetry over many sequential transactions. Such an intermediation chain ensures that the adverse selection problems counterparties face in each transaction are small enough to allow for socially efficient trading strategies by all parties involved. Our model makes novel predictions about network formation and rent extraction when adverse selection problems impede the efficiency of trade.

Number of Pages in PDF File: 44

Keywords: Intermediation Chains, Asymmetric Information, OTC Trading Networks, Order-Flow Agreements, Information Percolation

JEL Classification: G20, D82, D85

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Date posted: March 14, 2013 ; Last revised: May 17, 2014

Suggested Citation

Glode, Vincent and Opp, Christian C., Adverse Selection and Intermediation Chains (May 16, 2014). Available at SSRN: http://ssrn.com/abstract=2232942 or http://dx.doi.org/10.2139/ssrn.2232942

Contact Information

Vincent Glode (Contact Author)
University of Pennsylvania - The Wharton School ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
Christian C. Opp
University of Pennsylvania - The Wharton School ( email )
3620 Locust Walk
2428 SH-DH
Philadelphia, PA 19104
United States
215-573-3186 (Phone)
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