Competition Among Exchanges

40 Pages Posted: 27 Sep 2000

See all articles by Tano Santos

Tano Santos

Columbia Business School; National Bureau of Economic Research (NBER)

José Scheinkman

Columbia University; Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 2000

Abstract

Does competition among financial intermediaries lead to excessively low standards? To examine this question, we construct a model where intermediaries design contracts to attract trading volume, taking into consideration that traders differ in credit quality and may default. When credit quality is observable, intermediaries demand the "right" amount of guarantees. A monopolist would demand fewer guarantees. Private information about credit quality has an ambiguous effect in a competitive environment. When the cost of default is large (small), private information leads to higher (lower) standards. We exhibit examples where private information is present and competition produces higher standards than monopoly.

JEL Classification: G12

Suggested Citation

Santos, Tano and Scheinkman, José, Competition Among Exchanges (April 2000). Available at SSRN: https://ssrn.com/abstract=222737 or http://dx.doi.org/10.2139/ssrn.222737

Tano Santos (Contact Author)

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José Scheinkman

Columbia University ( email )

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