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Federal Reserve Bank of Richmond
Economic Quarterly
Inefficiency in a Simple Model of Production and Bilateral Trade
Zachary Bethune
Bruno Sultanum
Nicholas Trachter
Abstract

We study a simple model of over-the-counter trade with production. We characterize the equilibrium, and we show that the equilibrium is always inefficient, independent of how the trade surplus is split among trade participants. We argue that this is due to a double hold-up problem that it is at the core of models used to study trade in over-the-counter markets. Finally, we show an example, which we interpret as a limiting case of the general model where the inefficiency vanishes.


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Zachary Bethune & Bruno Sultanum & Nicholas Trachter, "Inefficiency in a Simple Model of Production and Bilateral Trade" , Federal Reserve Bank of Richmond, Economic Quarterly, issue 3Q, pages 137-151, 2018.
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Keywords: otc; over-the-counter; trade
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