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Market Structure of Intermediation

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  • Zhong, Hongda

Abstract

Skilled intermediaries can represent multiple investors, generating economies of scale in screening costs. However, locating competent intermediaries recreates the screening friction. I provide a framework to study the structure of intermediation chain, focusing on its length, sector size, skill distribution, and effort choice. Counterintuitively, efficient intermediation does not rely on intermediaries being more skilled. Longer chains enhance welfare and reduce the market power of the intermediary sector. Moreover, self-selection of intermediaries into two heterogeneous layers can lead to greater efficiency compared to structures with homogeneous qualities across layers. These findings have implications for delegated asset management industry.

Suggested Citation

  • Zhong, Hongda, 2022. "Market Structure of Intermediation," CEPR Discussion Papers 17619, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17619
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    More about this item

    Keywords

    Screening;

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G00 - Financial Economics - - General - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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