Working Paper

Non-exclusive contracts, collateralized trade, and a theory of an exchange

Abstract: Liquid markets where agents have limited capacity to sign exclusive contracts may permit agents to promise the same asset to multiple counterparties and subsequently default. I show that in such markets an exchange can arise as an intermediary whose only role is to set limits on the number of contracts that agents can report voluntarily. In some cases, these limits must be non-binding in equilibrium, and reported trades must not be made public. A (costly) alternative to an exchange is collateralized trade, and the gains from an exchange increase when agents have more intangible capital (e.g., reputation) or when markets are more liquid. ; Superseded by Working Paper 10-28R: Inducing agents to report hidden trades: a theory of an intermediary.

Keywords: Contracts; Trade;

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 2003

Number: 03-3