Financial Intermediaries in a Search Theoretic Model of Bilateral Exchange


This note investigates an effect of financial intermediaries on bilateral exchange. In a search theoretic framework, it is possible for Pareto inefficient outcomes in bilateral exchanges between firms and laborers, when firms are forced to secure liquidity through financial intermediaries and are unable to communicate the value of the firm to the intermediary. The quantity of labor supplied to firms in the model is below the Pareto optimal level.


Search Theory

Share and Cite:

Chang, A. (2015) Financial Intermediaries in a Search Theoretic Model of Bilateral Exchange. Theoretical Economics Letters, 5, 24-27. doi: 10.4236/tel.2015.51005.

Conflicts of Interest

The authors declare no conflicts of interest.


[1] Arrow, K.J. (1962) Economic Welfare and the Allocation of Resources for Invention. In: Nelson, R.R., Ed., The Rate and Direction of Inventive Activity, Princeton University Press, Princeton, 609-626.
[2] Hall, B.H. and Lerner, J. (2009) The Financing of R & D and Innovation. NBER Working Paper 15325.
[3] Allen, F. and Santomero, A.M. (2001) What Do Financial Intermediaries Do? Journal of Banking and Finance, 25, 271-294.
[4] Antunes, A., Cavalcanti, T. and Villamil, A. (2013) Costly Intermediation and Consumption Smoothing. Economic Inquiry, 51, 459-472.
[5] Nosal, E. and Rocheteau, G. (2011) A Search Approach to Money, Payments, and Liquidity. MIT Press, Cambridge.
[6] Beck, T., Demirguc-Kunt, A. and Levine, R. (2000) A New Database on the Structure and Development of the Financial Sector. World Bank Economic Review, 14, 271-294.

Copyright © 2023 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.