"We should take care not to make the intellect our god; it has, of course, powerful muscles, but no personality."
--- Albert Einstein.
ABSTRACT: We propose an information-based theory of financial intermediation. Investors are heterogeneous in what they know about their counterparties trade motivation. Better experts, that is, those who know more about their counterparties when bargaining, extract more rents and are more central to trade---composing the core of the core-periphery market structure widely documented in over-the-counter financial markets. Empirically, the model has two predictions that differ from alternative models of intermediation: (1) investors trade more when there is more information avaialable regarding their own trade needs; (2) this effect is less important when trading with more central investors. We combine trade reports on credit-default swaps with information on financial institutions that file the 13-F Form to test our results. The data is consistent with both our predictions. Firms that file the 13-F Form are more likely to trade in the weeks after the report than in the weeks before. Moreover, this effect is weaker when controling for the centrality of the firms' counterparties.
ABSTRACT: Experimental studies in monetary economics usually study infinite horizon models. Yet, the time constraints of the laboratory sessions in which these models are conducted create finite horizons that imply monetary equilibria cannot exist. Moreover, laboratory subjects do not treat the probabilistic termination rule typically used in a manner consistent with the discount factor that the rule is intended to replace. Thus, it is unclear whether these experiments evaluate subjects' use of money to ameliorate trading frictions as an equilibrium phenomenon, their inability to understand backward induction, or features of games that promote the use of money behaviorally, even when doing so is not an equilibrium strategy. To address these issues, we present a pair of finite-horizon games where monetary exchange is an equilibrium, and report experimental results that evaluate behavior in these games in light of a finitely repeated alternative where monetary exchange is not an equilibrium.