Title

Intermediation as Rent Extraction

Author(s)

Maryam Farboodi Maryam Farboodi (MIT)

Gregor Jarosch Gregor Jarosch (Princeton University)

Guido Menzio Guido Menzio (New York University)

Ursula Wiriadinata Ursula Wiriadinata (IMF)

Abstract

We propose a theory of intermediation as rent extraction, and explore its implications for the extent of intermediation, welfare and policy. A frictional asset market is populated by agents who are heterogeneous with respect to their bargaining skills, as some can commit to take-it-or-leave-it offers and others cannot. In equilibrium, agents with commitment power act as intermediaries and those without act as final users. Agents with commitment trade on behalf of agents without commitment to extract more rents from third parties. If agents can invest in a commitment technology, there are multiple equilibria differing in the fraction of intermediaries. Equilibria with more intermediaries have lower welfare and any equilibrium with intermediation is inefficient. Intermediation grows as trading frictions become small and during times when interest rates are low. A simple transaction tax can restore efficiency by eliminating any scope for bargaining.

Creation Date

2019-08

Section URL ID

Paper Number

2019-15

URL

https://drive.google.com/file/d/1An607VD9UHGB7WSSrCdz9vamIwzPjtLV/view

File Function

Jel

D40

Keyword(s)

Intermediation, Search frictions, Rent extraction

Suppress

false

Series

13