Download This PaperFinancial Intermediation Chains in an OTC Market
Management Science, Forthcoming
49 Pages Posted: 14 Mar 2015 Last revised: 27 Apr 2020
Date Written: April 26, 2020
Abstract
We analyze financial intermediation chains in a search economy, which is populated by investors with heterogeneous valuations of an asset. In equilibrium, investors with moderate valuations choose to be intermediaries, while those with extreme valuations are their customers. The average length of intermediation chains is shown to be decreasing in search cost, search speed, and market size, but increasing in investors' trading needs. These predictions are distinct from those implied by existing models in the literature. Our empirical evidence, based on data from the U.S. corporate bond market, is mostly consistent with our model predictions.
Keywords: Search, Chain, Financial Intermediation, Multiplicity, Stability.
JEL Classification: G10
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