By Jessica McCann
Welcome to Working Papers of the Week! Our goal is to highlight the valuable and interesting research Kennedy School faculty members are doing here and abroad by featuring new working papers recently uploaded to the site.
This week in working papers:
Liquidity Risk in Sequential Trading Networks
Kariv, Shachar, Maciej Kotowski, and C. Matthew Leister
This paper develops a model of intermediated exchange with budget-constrained traders who are embedded in a trading network. An experimental investigation confirms the theory’s baseline predictions. Traders adopt monotone strategies with higher-budget intermediaries offering to pay more for tradable assets. Traders closer to the final consumer in the network experience systematically greater payoffs due to lessened strategic uncertainty. While private budget constraints inject uncertainty into the trading environment, they also serve as a behavioral speed-bump, preventing traders from experiencing excessive losses due to overbidding.
To read the full working paper, click here.
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