Benchmarks in Search Markets

62 Pages Posted: 27 Oct 2014 Last revised: 6 May 2023

See all articles by Darrell Duffie

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Canadian Derivatives Institute

Piotr Dworczak

Northwestern University - Department of Economics

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

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Date Written: October 2014

Abstract

We characterize the price-transparency role of benchmarks in over-the-counter markets. A benchmark can, under conditions, raise social surplus by increasing the volume of beneficial trade, facilitating more efficient matching between dealers and customers, and reducing search costs. Although the market transparency promoted by benchmarks reduces dealers' profit margins, dealers may nonetheless introduce a benchmark to encourage greater market participation by investors. Low-cost dealers may also introduce a benchmark to increase their market share relative to high-cost dealers. We construct a revelation mechanism that maximizes welfare subject to search frictions, and show conditions under which it coincides with announcing the benchmark.

Suggested Citation

Duffie, James Darrell and Dworczak, Piotr and Zhu, Haoxiang, Benchmarks in Search Markets (October 2014). NBER Working Paper No. w20620, Available at SSRN: https://ssrn.com/abstract=2515198

James Darrell Duffie (Contact Author)

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Piotr Dworczak

Northwestern University - Department of Economics ( email )

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Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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