Ed Nosal, Yuet-Yee Wong, and Randall Wright
Working Paper 2019-05
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We analyze agents' decisions to act as producers or intermediaries using equilibrium search theory. Extending previous analyses in various ways, we ask when intermediation emerges and study its efficiency. In one version of the framework, meant to resemble retail, middlemen hold goods, which entails (storage) costs; that model always displays uniqueness and simple transition dynamics. In another version, middlemen hold assets, which entails negative costs, that is, positive returns; that model can have multiple equilibria and complicated belief-based dynamics. These results are consistent with the venerable view that intermediation in financial markets is more prone to instability than in goods markets.
JEL classification: G24, D83
Key words: middlemen, intermediation, search, bargaining, multiplicity
An earlier version of this paper circulated as "Who Wants To Be A Middleman?" For input, the authors thank Karl Shell,
Alberto Trejos, Steve Williamson, Gregor Jarosch, Giorgia Piacentino, and seminar participants at the Chicago Fed,
Minneapolis Fed, Philadelphia Fed, Cornell, Simon Fraser, UNC, Wisconsin, the Canadian Macro Study Group, and the St.
Louis Fed/Tsinghua Monetary Policy Conference in Beijing. The authors especially thank Yu Zhu, who helped with the
numerical work. Wright acknowledges support from the Ray Zemon Chair in Liquid Assets at the Wisconsin School of
Business. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta
or the Federal Reserve System. Any remaining errors are the authors’ responsibility.
Please address questions regarding content to Ed Nosal, Research Department, Federal Reserve Bank of Atlanta,
1000 Peachtree Street NE, Atlanta, GA 30309-4470, 404-498-8814, firstname.lastname@example.org; Yuet-Yee Wong, Department of Economics, Binghamton University, P.O. Box 6000, Binghamton, NY 13902, yywongOl@gmail.com; or Randall Wright, School
of Business, University of Wisconsin-Madison and NBER, Grainger Hall, 975 University Avenue, Madison, WI 53706,
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