Competition Among Exchanges
Coauthor(s): José Scheinkman.
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Does competition among financial intermediaries lead to excessively low standards? To examine this question, we construct a model where intermediaries design contracts to attract trading volume, taking into consideration that traders differ in credit quality and may default. When credit quality is observable, intermediaries demand the "right" amount of guarantees. A monopolist would demand fewer guarantees. Private information about credit quality has an ambiguous effect in a competitive environment. When the cost of default is large (small), private information leads to higher (lower) standards. We exhibit examples where private information is present and competition produces higher standards than monopoly does.
Source: Quarterly Journal of Economics
Santos, Tano, and Jose Scheinkman. "Competition Among Exchanges." Quarterly Journal of Economics 116, no. 3 (August 2001): 1027-61.