Committing to trade: A theory of intermediation

In a “lemons” market, a shock to gains from trade precedes the buyers’ offer. Lower gains exacerbate adverse selection. Trading with intermediaries before observing the shock commits sellers not to keep high-quality assets in such states, improving surplus despite impeding efficient use of information. To add value, intermediaries need not possess superior skills or information. If sellers choose intermediaries to overcome search frictions, traded assets’ quality and welfare increase with search costs. The theory offers a novel perspective on the underwrite-to-distribute model in leveraged loans, and predicts that dealers’ shift from market-making to match-making may worsen adverse selection in over-the-counter markets.