Social Optimal Search Intensity in Over-the-Counter Markets

87 Pages Posted: 12 Aug 2020

See all articles by Shuo Liu

Shuo Liu

Tsinghua University School of Economics and Management

Date Written: July 12, 2020

Abstract

This paper analyzes OTC market participants' endogeneous search intensity in competitive equilibrium and social optimal cases. We develop a random search-and-match model where agents (market participants) are allowed to choose and adjust their search intensities based on two idiosyncratic states: asset position and liquidity need. We find that:

[1] in competitive equilibria with different market parameters, agents can switch between the core and periphery on the trading network.

[2] it is the social optimal case that there is no inter-mediation, in the sense that no agent searches at positive speeds on both the buy and sell sides of the market.

In competitive equilibrium, there always exist some agents over-searching and some other agents under-searching. We also discuss related policy implications.

Keywords: endogenous search intensity, social optimal solution, core-periphery network

JEL Classification: G10, G12, G21

Suggested Citation

Liu, Shuo, Social Optimal Search Intensity in Over-the-Counter Markets (July 12, 2020). Available at SSRN: https://ssrn.com/abstract=3649744 or http://dx.doi.org/10.2139/ssrn.3649744

Shuo Liu (Contact Author)

Tsinghua University School of Economics and Management ( email )

Beijing, 100084
China
9192602410 (Phone)

HOME PAGE: http://https://www.shuo-liu.com/

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