A Dynamic Model of Search and Intermediation
35 Pages Posted: 10 Feb 2010
Date Written: February 9, 2010
Abstract
This paper develops a dynamic model of an economy with search frictions in which homogeneous agents choose between specializing as producers or as merchants, and can change occupation at any time. Merchants operate alongside a decentralized search market and provide immediacy in trade in return for a price. Agents who know the location of a merchant have the option of paying the merchant’s price and avoiding search. We characterize equilibria in symmetric Markov strategies, and derive conditions under which merchants and their clients form a repeated relationship. We analyze welfare and explore conditions for the endogenous rise of an institution of intermediation.
Keywords: Search, endogenous intermediation, repeated interaction
JEL Classification: D02, D51, D83
Suggested Citation: Suggested Citation