This paper proposes a theory of intermediation in which intermediaries emerge endogenously as the choice of agents. In contrast to the previous trading models based on random matching or exogenous networks, we allow traders to explicitly choose their trading partners as well as the number of trading links in a dynamic framework. We show that traders with higher trading needs optimally choose to match with traders with lower needs for trade, and they build fewer links in equilibrium. As a result, traders with the least trading need turn out to be the most connected and have the highest gross trade volume. The model therefore endogenously generates a coreperiphery trading network that we often observe: a financial architecture that involves a small number of large, interconnected institutions. We use this framework to study bidask spreads, trading volume, asset allocation. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior permission in writing of the publisher nor be issued to the public or circulated in any form other than that in which it is published.Requests for permission to reproduce any article or part of the Working Paper should be sent to the editor at the above address. Abstract This paper proposes a theory of intermediation in which intermediaries emerge endogenously as the choice of agents. In contrast to the previous trading models based on random matching or exogenous networks, we allow traders to explicitly choose their trading partners as well as the number of trading links in a dynamic framework. We show that traders with higher trading needs optimally choose to match with traders with lower needs for trade, and they build fewer links in equilibrium. As a result, traders with the least trading need turn out to be the most connected and have the highest gross trade volume. The model therefore endogenously generates a core-periphery trading network that we often observe: a financial architecture that involves a small number of large, interconnected institutions. We use this framework to study bid-ask spreads, trading volume, asset allocation.

Lagos thanks the support from the C.V. Starr Center for Applied Economics at NYU. Zhang thanks the support from the Centre for Macroeconomics at LSE. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

In this paper we use micro data on both trade and production for a sample of large Chinese manufacturing …rms in the footwear industry from 2002-2006 to estimate an empirical model of export demand, pricing, and market participation by destination market. We use the model to construct indexes of …rm-level demand, marginal cost, and …xed cost. The empirical results indicate substantial …rm heterogeneity in all three dimension with demand being the most dispersed. The …rm-speci…c demand and marginal cost components account for over 30 percent of market share variation, 40 percent of sales variation, and over 50 percent of price variation among exporters. The …xed cost index is the primary factor explaining di¤erences in the pattern of destination markets across …rms. The estimates are used to analyze the supply reallocation following the removal of the quota on Chinese footwear exports to the EU. This led to a rapid restructuring of export supply sources on both the intensive and extensive margins in favor of …rms with high demand and low …xed costs indexes, with marginal cost di¤erences not being important. Forthcoming, Review of Economic Studies

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At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w25106.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

We develop a dynamic general equilibrium monetary model where a shortage of collateral and incomplete markets motivate the formation of credit relationships and the rehypothecation of assets. Rehypothecation improves resource allocation because it permits liquidity to flow where it is most needed. The liquidity benefits associated with rehypothecation are shown to be more important in high-inflation (high interest rate) regimes. Regulations restricting the practice are shown to have very different consequences depending on how they are designed. Assigning collateral to segregated accounts, as prescribed in the Dodd-Frank Act, is generally welfare-reducing. In contrast, an SEC15c3-3 type regulation can improve welfare through the regulatory premium it confers on cash holdings, which are inefficiently low when interest rates and inflation are high.

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