Liquidity Risk in Sequential Trading Networks

32 Pages Posted: 9 Oct 2016 Last revised: 14 Oct 2017

See all articles by Shachar Kariv

Shachar Kariv

University of California, Berkeley - Department of Economics

Maciej H. Kotowski

Harvard University - Harvard Kennedy School (HKS)

C. Matthew Leister

Monash University - Department of Economics

Date Written: October 2, 2016

Abstract

This paper develops a model of intermediated exchange with budget-constrained traders who are embedded in a trading network. An experimental investigation confirms the theory’s baseline predictions. Traders adopt monotone strategies with higher-budget intermediaries offering to pay more for tradable assets. Traders closer to the final consumer in the network experience systematically greater payoffs due to lessened strategic uncertainty. While private budget constraints inject uncertainty into the trading environment, they also serve as a behavioral speed-bump, preventing traders from experiencing excessive losses due to overbidding.

Keywords: Experiment, Economic Networks, Intermediation, Liquidity, Auctions, Strategic Uncertainty

JEL Classification: L14, C91, D85, D44, G10

Suggested Citation

Kariv, Shachar and Kotowski, Maciej H. and Leister, Christian Matthew, Liquidity Risk in Sequential Trading Networks (October 2, 2016). HKS Working Paper No. RWP16-039. Available at SSRN: https://ssrn.com/abstract=2849032 or http://dx.doi.org/10.2139/ssrn.2849032

Shachar Kariv

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

Maciej H. Kotowski (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

Christian Matthew Leister

Monash University - Department of Economics ( email )

900 Dandenong Rd
Caulfield East, VIC 3145
Australia

HOME PAGE: http://sites.google.com/site/cmleister/home

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