Econometrica: Sep, 2019, Volume 87, Issue 5

Trading Networks with Frictions

https://doi.org/10.3982/ECTA14159
p. 1633-1661

Tamás Fleiner, Ravi Jagadeesan, Zsuzsanna Jankó, Alexander Teytelboym

We show how frictions and continuous transfers jointly affect equilibria in a model of matching in trading networks. Our model incorporates distortionary frictions such as transaction taxes and commissions. When contracts are fully substitutable for firms, competitive equilibria exist and coincide with outcomes that satisfy a cooperative solution concept called trail stability. However, competitive equilibria are generally neither stable nor Pareto‐efficient.

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