Exclusive Intermediation

48 Pages Posted: 18 Mar 2014 Last revised: 30 Mar 2014

See all articles by Itay P Fainmesser

Itay P Fainmesser

Johns Hopkins University - Carey Business School

Date Written: March 17, 2014

Abstract

In this paper, we argue that an important function fulfilled by intermediaries is to facilitate trust by enabling social pressure towards the enforcement of informal agreements. To that end, we develop a new model that uses network theory to show that intermediaries who have exclusivity over a large enough number of interaction opportunities are able to exploit their position in the chains of interactions in the market to overcome incentive problems that would otherwise shut down the market. We derive conditions on the network structure under which intermediaries fulfill this function. Finally, we analyze two applications: (1) the market for short term apartment rentals; and (2) a financial market with investors and entrepreneurs. We provide additional examples suggesting that this paper uncovers an important channel through which intermediaries operate.

Keywords: Networks, intermediation, long-term relationships, self-governance, community enforcement, trust, social capital, cooperation, strategic default, financial intermediation, Airbnb

Suggested Citation

Fainmesser, Itay Perah, Exclusive Intermediation (March 17, 2014). Available at SSRN: https://ssrn.com/abstract=2410408 or http://dx.doi.org/10.2139/ssrn.2410408

Itay Perah Fainmesser (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://https://sites.google.com/site/itaypfainmesser/home

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