A Search Model of Centralized and Decentralized Trade
38 Pages Posted: 18 Oct 2004
Date Written: April 2004
Abstract
This paper presents a search model of centralized and decentralized trade. In a centralized market, trades are intermediated by market makers at publicly posted bid-ask prices. In a decentralized market, traders search counterparties. Prices are negotiated and transactions are conducted in private meetings among traders. Traders can choose which market to enter. The determinant of bid-ask spreads and liquidity is analyzed. The welfare consequence of the market fragmentation is also analyzed. Some limiting results and convergence to the Walrasian equilibrium as search fricitions or transaction costs vary are established.
Keywords: Search, matching and bargaining, bid-ask spread, liquidity, welfare, Walrasian equilibrium
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