Search and Intermediation: Toward a Model of the Merchant Trader

Abstract

This paper develops a dynamic model of an economy in which homogeneous agents choose between specializing as producers or as merchants, and can change occupation at any time. Merchants operate along a decentralized search market and provide immediacy in exchange in return for a price. We characterize equilibria in symmetric Markov strategies, and derive conditions under which merchants and their clients form a repeated relationship. We analyze welfare and discuss the prospect of an endogenous rise of an institution of intermediation.

Keywords: Search, intermediation, repeated interaction, Markov equilibrium, endogenous emergence of merchants

JEL Classification: D02, D51, D83