Committing to Trade: A Theory of Intermediation

60 Pages Posted: 20 Dec 2023 Last revised: 12 Apr 2024

See all articles by Francesco Sannino

Francesco Sannino

Frankfurt School of Finance & Management, Finance Department

Date Written: December 7, 2023

Abstract

In a “lemons” market, a shock to gains from trade is publicly observed just before buyers make their offer. When gains from trade are lower, prices contain a larger adverse selection discount. By trading with intermediaries beforehand, sellers commit not to keep high-quality assets in such states, which may improve surplus, despite impeding efficient use of available information. The distribution of agents' valuations and the level of uncertainty in gains from trade affect intermediaries' markups, traded assets' quality and volumes. In the optimal contract, intermediaries (inefficiently) ration buyers when gains from trade are lowest, as documented in the leveraged loans market.

Keywords: intermediaries, adverse selection, OTC

JEL Classification: D82, G23, G14,

Suggested Citation

Sannino, Francesco, Committing to Trade: A Theory of Intermediation (December 7, 2023). Available at SSRN: https://ssrn.com/abstract=4657365 or http://dx.doi.org/10.2139/ssrn.4657365

Francesco Sannino (Contact Author)

Frankfurt School of Finance & Management, Finance Department ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

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