Inefficiency in a Simple Model of Production and Bilateral Trade
15 Pages Posted: 10 Dec 2018 Last revised: 21 Feb 2019
Date Written: 2018
We study a simple model of over-the-counter trade with production. We characterize the equilibrium, and we show that the equilibrium is always inefficient, independent of how the trade surplus is split among trade participants. We argue that this is due to a double hold-up problem that it is at the core of models used to study trade in over-the-counter markets. Finally, we show an example, which we interpret as a limiting case of the general model where the inefficiency vanishes.
Keywords: otc, over-the-counter, trade
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