Intermediation as Rent Extraction

This paper develops a theory of asset intermediation as a pure rent extraction activity. Agents meet bilaterally in a random fashion. Agents differ with respect to their valuation of the asset's dividends and with respect to their ability to commit to take-it-or-leave-it offers. In equilibrium, agents with commitment behave as intermediaries, while agents without commitment behave as end users. Agents with commitment intermediate the asset market only because they can extract more of the gains from trade when reselling or repurchasing the asset. We study the extent of intermediation as a rent extraction activity by examining the agents' decision to invest in a technology that gives them commitment. We find that multiple equilibria may emerge, with different levels of intermediation and with lower welfare in equilibria with more intermediation. We find that a decline in trading frictions leads to more intermediation and typically lower welfare, and so does a decline in the opportunity cost of acquiring commitment. A transaction tax can restore efficiency