Social Optimal Search Intensity in Over-the-Counter Markets

100 Pages Posted: 12 Aug 2020 Last revised: 13 May 2024

See all articles by Shuo Liu

Shuo Liu

Tsinghua University - Tsinghua University School of Economics and Management

Date Written: July 12, 2020

Abstract

This paper investigates the endogenous search intensity of traders in the OTC market, examining both competitive equilibrium and socially optimal scenario. Our study introduces a random search-and-matching model, where traders have the flexibility to ex post choose and adjust their search intensities based on two trader-level states: asset position and preference type. Our findings uncover the following key insights: (1) Changes in the level of search friction and/or the frequency of shocks on traders’ preference type may lead to traders switching between high and low search intensities, shifting between the core and periphery of the trading network; and (2) Social optimality is achieved in the absence of intermediation, where no trader simultaneously invests in positive buying intensity and positive selling intensity. In contrast, competitive equilibrium reveals that some traders tend to over-search while others under-search, compared to the socially optimal outcome.

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). Review of Economic Dynamics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3649744 or http://dx.doi.org/10.2139/ssrn.3649744

Shuo Liu (Contact Author)

Tsinghua University - Tsinghua University School of Economics and Management ( email )

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