Author: Thomas Gall (University of Southampton)
Paper no: 1409
This paper examines the role of market intermediaries that provide trading parties with the institutional infrastructure that governs their contracting in determining market institutions and allocative efficiency in an economy. When there are limits to compensating partners, e.g. due to moral hazard problems and limited liability, and agents differ in their attributes, heterogeneity of market intermediaries in terms of contractual infrastructure may be needed to ensure that a competitive allocation attains a surplus efficient sorting of agents. This may involve the use of institutional infrastructure that is dominated in terms of joint surplus generated in any match, providing a rationale for a lack of convergence of institutional frameworks and the survival of outdated contractual institutions. A possible application is the use of certain types of contracts in venture capital markets. Competition of intermediaries by setting both institutional infrastructure and user fees can ensure an efficient degree of institutional diversity.
Keywords: Matching, nontransferable utility, sorting, self-selection,
two-sided markets, intermediaries, platform competition.
JEL Codes: C78, D40, L10.