Inducing agents to report hidden trades: A theory of an intermediary

Abstract

When contracts are unobserved (and nonexclusive), agents can promise the same asset to multiple counterparties and subsequently default. I show that a central mechanism can extract all relevant information about contracts that agents enter by inducing them to report one another. The mechanism sets position limits and reveals the names of agents who hit the limits according to (voluntary) reports from their counterparties. This holds even if sending reports is costly and even if agents can collude. In some cases, an agent's position limit must be nonbinding in equilibrium. The mechanism has some features of a clearinghouse. © The Authors 2011. Published by Oxford University Press.