Dealers in the over‐the‐counter municipal bond market form trading networks with other dealers to mitigate search frictions. Regulatory data show that this network has a core‐periphery structure with 10 to 30 hubs and over 2,000 peripheral broker‐dealers in which bonds flow from periphery to core and partially back. Central dealers charge investors up to double the round‐trip markups compared to peripheral dealers. In turn, central dealers provide immediacy by matching buyers with sellers more directly and prearranging fewer trades, especially during stress times. Investors thus face a trade‐off between execution cost and speed, consistent with network models of decentralized trade.

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This paper provides experimental evidence for the theory of Che et al. (2013, Pandering to persuade, American Economic Review, 103(1), 47–79). Basic communication games with outside options developed by Che et al. (2013, Pandering to persuade, American Economic Review, 103(1), 47–79) are tested in the experiments, and experimental variations with additional conflicts over projects and with private information about outside options are also investigated. Moreover, in these games, strategies concerning delegation have been discussed as well. In general, the experimental results are aligned with the theoretical predictions. As the value of the outside options increases, communication becomes less informative and the experts may pander toward the conditionally better-looking project, the decision makers take their outside options more often and retain their decision rights with higher frequencies.

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Unlicensed moneylending is when an unlicensed individual, often called loan shark, lends money to another individual. We model the unlicensed moneylending market to analyze relational contracting between borrowers and guarantors. A guarantor repeatedly decides whether to act as the guarantor for a borrower, whereas the borrower repeatedly chooses a loan shark to borrow from and determines his effort in repaying loans. We show that the borrower starts by trying different loan sharks to learn about their forcefulness in collecting repayments and eventually only trades with those who are less forceful. Inefficient suspension or termination of relationship is necessary to discipline the borrower’s behavior when the parties are still uncertain about the loan sharks’ forcefulness, but can be avoided when the uncertainty is resolved. We also show in extensions that the borrower may increase his efforts over time as the relationship becomes more valuable to him, while the guarantor can resort to direct monitoring of the borrower’s effort as a substitute for the suspension or termination of relationship.