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Faculty of Economics

CWPE Cover

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

Brokerage

CWPE2005

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  

PDF: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe2005.pdf

Open Access Link: https://doi.org/10.17863/CAM.52425

Keynes Fund Project(s):
Experiments on Financial Networks (JHLB)  
Experiments on 'Networked Markets' (JHLR)