Intermediation in Network Economics: Theory and Applications.

Abstract

The dissertation represents an attempt to study the role of intermediation in economic networks. Intermediation is widely observed in a variety of markets such as agriculture, transport, communication, international trade, and finance. Examples of intermediaries on networks include the traders in over the counter markets and dealers in artwork markets connecting buyers to sellers, not-for-profit associations connecting donors to recipients, and banks connecting lenders to borrowers. Such intermediaries often bring new trading opportunities between disconnected agents, potentially making markets more efficient than without intermediation. However, such intermediation may come at a cost that may include the intermediaries charging for their connecting abilities or the spreading of risks to other intermediaries and the whole system. The main work includes three chapters that theoretically and empirically study the implications of intermediation in a variety of markets, such as the transmission of resources through networks and volatility spillover in the financial market. For markets of resource transmission, it studies equilibrium prices that intermediaries charge for the use of their connecting abilities, and conditions in the connecting abilities under which the cost of intermediation can be minimized. Such analysis is done in the complete and incomplete information setting with respect to the connecting abilities of intermediaries. The theoretical models illustrate how the network structure, the connecting abilities of intermediaries and information shape the outcomes of pricing mechanism in markets. This dissertation also provides an empirical study about how risk is spread in financial networks, especially for industry portfolios in the stock market. It shows that the network of industry portfolios’ volatility evolves over time, and the financial industry is the main risk sender during the financial crisis of 2007 to 2009.