Intermediation as Rent Extraction

58 Pages Posted: 23 Jan 2017 Last revised: 24 Mar 2017

See all articles by Maryam Farboodi

Maryam Farboodi

Princeton University - Bendheim Center for Finance

Gregor Jarosch

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Guido Menzio

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 31, 2016

Abstract

This paper develops a theory of asset intermediation as a pure rent extraction activity. Agents meet bilaterally in a random fashion. Agents differ with respect to their valuation of the asset's dividends and with respect to their ability to commit to take-it-or-leave-it offers. In equilibrium, agents with commitment behave as intermediaries, while agents without commitment behave as end users. Agents with commitment intermediate the asset market only because they can extract more of the gains from trade when reselling or repurchasing the asset. We study the extent of intermediation as a rent extraction activity by examining the agents' decision to invest in a technology that gives them commitment. We find that multiple equilibria may emerge, with different levels of intermediation and with lower welfare in equilibria with more intermediation. We find that a decline in trading frictions leads to more intermediation and typically lower welfare, and so does a decline in the opportunity cost of acquiring commitment. A transaction tax can restore efficiency

Keywords: Intermediation, Rent Extraction

JEL Classification: D11, D21, D43, E32

Suggested Citation

Farboodi, Maryam and Jarosch, Gregor and Menzio, Guido, Intermediation as Rent Extraction (December 31, 2016). PIER Working Paper No. 16-026, Available at SSRN: https://ssrn.com/abstract=2904061 or http://dx.doi.org/10.2139/ssrn.2904061

Maryam Farboodi

Princeton University - Bendheim Center for Finance ( email )

26 Prospect Avenue
Princeton, NJ 08540
United States

Gregor Jarosch

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Guido Menzio (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-5170 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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