On the Efficiency of Long Intermediation Chains
30 Pages Posted: 30 May 2016 Last revised: 17 Oct 2017
Date Written: August 21, 2017
Intermediation chains represent a common pattern of trade in over-the-counter markets. We study a classic problem impeding trade in these markets: an agent uses his market power to inefficiently screen a privately informed counterparty. We show that, generically, if efficient trade is implementable via any incentive-compatible mechanism, it is also implementable via a trading network that takes the form of a sufficiently long intermediation chain. We characterize information sets of intermediaries that ensure this striking result. Sparse trading networks featuring long intermediation chains might thus constitute an efficient market response to frictions, in which case no regulatory action is warranted.
Keywords: Intermediation Chains, Asymmetric Information, OTC Trading Networks, Monopoly Power, Double Marginalization
JEL Classification: D82, D85, G23, L12
Suggested Citation: Suggested Citation