Benchmarks in Search Markets
Journal of Finance, Forthcoming
Stanford University Graduate School of Business Research Paper No. 14-47
62 Pages Posted: 29 Oct 2014 Last revised: 23 Nov 2016
There are 2 versions of this paper
Benchmarks in Search Markets
Benchmarks in Search Markets
Date Written: November 21, 2016
Abstract
We characterize the price-transparency role of benchmarks in over-the-counter markets. A benchmark can, under conditions, raise social surplus by increasing the volume of beneficial trade, facilitating more efficient matching between dealers and customers, and reducing search costs. Although the market transparency promoted by benchmarks reduces dealers' profit margins, dealers may nonetheless introduce a benchmark to encourage greater market participation by investors. Low-cost dealers may also introduce a benchmark to increase their market share relative to high-cost dealers. We construct a revelation mechanism that maximizes welfare subject to search frictions, and show conditions under which it coincides with announcing the benchmark.
Keywords: Benchmark, Search, Transparency, OTC markets, LIBOR
JEL Classification: G12, G14, G18, G21, G23, D43, D47, D83
Suggested Citation: Suggested Citation