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Endogenous Trading Networks

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  • Condorelli, Daniele
  • Galeotti, Andrea

Abstract

We investigate the effects of a class of trading protocols on the architecture and efficiency properties of endogenously formed trading networks. In our model, the opportunity to sell valuable objects occurs randomly to different individuals. A sale can only be realized if two individuals are connected, directly or indirectly, but forming and maintaining a trading relation is a costly investment. When the outcome of trading is efficient and provides no intermediation rents, a tension between equilibrium and efficient networks emerges when the cost of forming a link is at an intermediate level. There are two types of inefficiencies. Either all equilibrium networks are under- connected when compared to efficient networks, or a multiplicity of equilibriam may exist and agents may fail to coordinate on the efficient equilibrium network

Suggested Citation

  • Condorelli, Daniele & Galeotti, Andrea, 2012. "Endogenous Trading Networks," Economics Discussion Papers 2871, University of Essex, Department of Economics.
    • Handle: RePEc:esx:essedp:2871
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    References listed on IDEAS

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    Cited by:

    1. Schürhoff, Norman & Hendershott, Terrence & Livdan, Dmitry & Li, Dan, 2017. "Relationship Trading in OTC Markets," CEPR Discussion Papers 12472, C.E.P.R. Discussion Papers.
    2. Roukny, Tarik & Georg, Co-Pierre & Battiston, Stefano, 2014. "A network analysis of the evolution of the German interbank market," Discussion Papers 22/2014, Deutsche Bundesbank.
    3. BEDAYO, Mikel & MAULEON, Ana & VANNETELBOSCH, Vincent, 2012. "Bargaining and delay in trading networks," LIDAM Discussion Papers CORE 2012046, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. De Kamps, Marc & Ladley, Daniel & Simaitis, Aistis, 2014. "Heterogeneous beliefs in over-the-counter markets," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 50-68.
    5. Terrence Hendershott & Dan Li & Dmitry Livdan & Norman Schürhoff, 2020. "Relationship Trading in Over‐the‐Counter Markets," Journal of Finance, American Finance Association, vol. 75(2), pages 683-734, April.
    6. Gauer, Florian & Hellmann, Tim, 2017. "Strategic formation of homogeneous bargaining networks," Center for Mathematical Economics Working Papers 529, Center for Mathematical Economics, Bielefeld University.
    7. Gauer, Florian, 2015. "Strategic Formation of Homogeneous Bargaining Networks," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112943, Verein für Socialpolitik / German Economic Association.
    8. Bedayo, Mikel & Mauleon, Ana & Vannetelbosch, Vincent, 2016. "Bargaining in endogenous trading networks," Mathematical Social Sciences, Elsevier, vol. 80(C), pages 70-82.
    9. Polanski Arnold & Cardona Daniel, 2012. "Multilevel Mediation in Symmetric Trees," Review of Network Economics, De Gruyter, vol. 11(3), pages 1-23, September.
    10. Gauer, F. & Hellmann, T., 2017. "Strategic formation of homogeneous bargaining networks," Games and Economic Behavior, Elsevier, vol. 106(C), pages 51-74.

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