Abstract
This paper develops a model of intermediated exchange with budget-constrained traders who are embedded in a trading network. An experimental investigation confirms the theory’s baseline predictions. Traders adopt monotone strategies with higher-budget intermediaries offering to pay more for tradable assets. Traders closer to the final consumer in the network experience systematically greater payoffs due to lessened strategic uncertainty. While private budget constraints inject uncertainty into the trading environment, they also serve as a behavioral speed-bump, preventing traders from experiencing excessive losses due to overbidding.
Highlights
In many decentralized markets, intermediary traders link producers and consumers
What price dynamics might we observe as goods are bought and resold in the market?
When there is one row of intermediary traders (R = 1), our model reduces to Che and Gale’s (1996) model of a common-value, first-price, sealed-bid auction with private budget constraints
Summary
Two key variables determine the effectiveness of market intermediaries. A trader needs to have adequate financial resources—either in the form of cash on hand or credit—to pay for the goods that he wishes to trade. Each intermediary depends on his network of potential counter-parties to source goods and to find buyers. The interaction between these variables raises several open questions: 1. How do intermediary traders account for others’ (possibly) limited financial capacity?. 2. What price dynamics might we observe as goods are bought and resold in the market?
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