Social Optimal Search Intensity in Over-the-Counter Markets
87 Pages Posted: 12 Aug 2020
Date Written: July 12, 2020
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:
 in competitive equilibria with different market parameters, agents can switch between the core and periphery on the trading network.
 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
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