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Liquidity Risk in Sequential Trading Networks

Author

Listed:
  • Kariv, Shachar

    (University of CA, Berkeley)

  • Kotowski, Maciej H.

    (Harvard University)

  • Leister, C. Matthew

    (Monash University)

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.

Suggested Citation

  • Kariv, Shachar & Kotowski, Maciej H. & Leister, C. Matthew, 2016. "Liquidity Risk in Sequential Trading Networks," Working Paper Series 16-039, Harvard University, John F. Kennedy School of Government.
    • Handle: RePEc:ecl:harjfk:16-039
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    File URL: https://research.hks.harvard.edu/publications/getFile.aspx?Id=1434
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    References listed on IDEAS

    as
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    Cited by:

    1. Choi, S. & Goyal, S. & Moisan, F., 2020. "Brokerage Rents and Intermediation Networks," Cambridge Working Papers in Economics 2005, Faculty of Economics, University of Cambridge.
    2. Kotowski, Maciej H., 2020. "First-price auctions with budget constraints," Theoretical Economics, Econometric Society, vol. 15(1), January.
    3. Jinsoo Bae & John H. Kagel, 2022. "Selling shares to budget-constrained bidders: an experimental study of the proportional auction," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 8(1), pages 45-55, December.
    4. Kotowski, Maciej H. & Leister, C. Matthew, 2018. "Trading Networks and Equilibrium Intermediation," Working Paper Series rwp18-001, Harvard University, John F. Kennedy School of Government.
    5. Choi, S. & Goyal, G. & Moisan, F., 2020. "Large Scale Experiments on Networks: A New Platform with Applications," Cambridge Working Papers in Economics 2063, Faculty of Economics, University of Cambridge.

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    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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