Intermediation in Networks

The Formation of a Core-Periphery Structure in Heterogeneous Financial Networks

“…This seems relevant in light of findings that the fit of the core-periphery network in the interbank market deteriorated during the recent financial crisis (in 't Veld and van Lelyveld, 2014;Martínez-Jaramillo et al, 2014;Fricke and Lux, 2015). Appendix A. Siedlarek's payoff function Siedlarek (2015) applies the bargaining protocol introduced by Merlo and Wilson (1995) to derive the distribution of a surplus for a trade that is intermediated by competing middlemen. The underlying idea is that one involved agent is selected to propose a distribution of the surplus.…”

“…the expected distribution of the surplus, taking into account that every agent proposes optimally under common knowledge of rationality of other possible future proposers? Siedlarek (2015) shows that the unique Markov perfect equilibrium is characterised by the following payoff function for any player i in a certain state:…”

“…In case m intermediaries compete for the trade between i and j (as in Figure A.13), the extracted intermediation rents are reduced. Siedlarek (2015) shows that:…”

“…We do not model this bargaining process explicitly. However, our assumptions on f e (·) and f m (·) generalise an explicit Rubinsteintype of bargaining process developed by Siedlarek (2015). From his bargaining protocol, in which δ has the interpretation of a discount factor, the distribution of the surplus is given…”

“…Below we will use this explicit function to illustrate our (more general) results in Example 1 and In Appendix A, we give a detailed explanation of the specification of payoffs by Siedlarek (2015). …”