On the Efficiency of Long Intermediation Chains

30 Pages Posted: 30 May 2016 Last revised: 17 Oct 2017

See all articles by Vincent Glode

Vincent Glode

University of Pennsylvania - The Wharton School

Christian C. Opp

University of Pennsylvania - The Wharton School

Xingtan Zhang

University of Colorado at Boulder - Leeds School of Business

Date Written: August 21, 2017

Abstract

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

Glode, Vincent and Opp, Christian C. and Zhang, Xingtan, On the Efficiency of Long Intermediation Chains (August 21, 2017). Journal of Financial Intermediation, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2785836 or http://dx.doi.org/10.2139/ssrn.2785836

Vincent Glode (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Christian C. Opp

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-573-3186 (Phone)

Xingtan Zhang

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

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