FIN-03-043 |
NYU Stern School of Business |
September 2003
Darrell Duffie, Nicolae Garleanu and Lasse Heje Pedersen
ABSTRACT
We study how intermediation and asset prices are affected by illiquidity
associated with search and bargaining. We compute explicitly
marketmakers&rsqou; bid and ask prices in a dynamic model with strategic
agents. Bid-ask spreads are lower if investors can more easily find
other investors or have more easy access to multiple marketmakers.
This distinguishes our theory from the information-based intermediation
, which implies higher spreads in connection with higher investor
sophistication. With a monopolistic marketmaker, bid-ask spreads
are higher if investors have easier access to the marketmaker. We discuss
several empirical implications and study endogenous search and
welfare.
Darrell Duffie
Institution: Graduate School of Business, Stanford University, Stanford, CA 94305-5015
Email: duffie@stanford.edu
Nicolae Garleanu
Institution: Wharton School, University of Pennsylvania, 3620 Locust Walk, Philadelphia, PA
19104-6367
Email: garleanu@wharton.upenn.edu
Lasse Heje Pedersen
Institution: Stern School of Business, New York University
Phone: (212) 998-0359
Fax: (212) 995-4233
Email: lpederse@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~lpederse
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