Inefficiency in a Simple Model of Production and Bilateral Trade

15 Pages Posted: 10 Dec 2018 Last revised: 21 Feb 2019

See all articles by Zachary Bethune

Zachary Bethune

University of Virginia

Bruno Sultanum

Federal Reserve Banks - Federal Reserve Bank of Richmond

Nicholas Trachter

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: 2018

Abstract

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

Suggested Citation

Bethune, Zachary and Sultanum, Bruno and Trachter, Nicholas, Inefficiency in a Simple Model of Production and Bilateral Trade (2018). Economic Quarterly, Issue 3Q, pp. 137-151, 2018. Available at SSRN: https://ssrn.com/abstract=3298011

Zachary Bethune (Contact Author)

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

Bruno Sultanum

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Nicholas Trachter

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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