Benchmarks in Search Markets

62 Pages Posted: 29 Oct 2014 Last revised: 23 Nov 2016

See all articles by Darrell Duffie

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)

Piotr Dworczak

University of Chicago - Becker Friedman Institute for Economics

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

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

Duffie, James Darrell and Dworczak, Piotr and Zhu, Haoxiang, Benchmarks in Search Markets (November 21, 2016). Journal of Finance, Forthcoming; Stanford University Graduate School of Business Research Paper No. 14-47. Available at SSRN: https://ssrn.com/abstract=2515582 or http://dx.doi.org/10.2139/ssrn.2515582

James Darrell Duffie

Stanford University - Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Piotr Dworczak

University of Chicago - Becker Friedman Institute for Economics ( email )

Chicago, IL 60637
United States

Haoxiang Zhu (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street E62-623
Cambridge, MA 02142
United States

HOME PAGE: http://www.mit.edu/~zhuh

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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