Liquidity Risk in Sequential Trading Networks

Kariv, Shachar, Maciej Kotowski, and C. Matthew Leister. "Liquidity Risk in Sequential Trading Networks." HKS Faculty Research Working Paper Series RWP16-039, October 2016.

Abstract

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.

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