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Choi, S., Goyal, S. and Moisan, F.

Brokerage

WP Number: 2002

Abstract: Dominant intermediaries are a defining feature of the modern economy. This paper studies the mechanisms that give rise to trading networks with a dominant intermediary.

Trades between actors require a direct link or a path that involves intermediaries. Links are costly. Efficiency therefore pushes towards connected networks with few links: this set includes the hub-spoke network, the cycle network and their variants. The hub-spoke network exhibits extreme inequality, while the cycle network yields equal payoffs for all traders.

We conduct a large scale experiment on link formation among traders; the game takes place in continuous time and allows for asynchronous choices. The main finding is that the pricing protocol - the rule dividing the surplus between traders and intermediaries - determines which of these two networks arises.

JEL Codes: C92 D83 D85 Z13

Author links: Sanjeev Goyal  Frederic Moisan  

PDF: wp2002.pdf

Open Access Link: 10.17863/CAM.52425


Theme: networks