An Information-based Theory of Financial Intermediation

We build a theory of financial intermediation based on the premise that some investors are better able to figure out the trade motives of their counterparties in bilateral meetings-screening experts. We solve for the equilibrium market structure and study how information asymmetries stemming from heterogeneity in screening expertise shape up the core-periphery trade structure. In particular, the core of the market is populated by screening experts: they have the largest share of trade volume, they are actively engaged in middleman activity, and trade with the most counterparties. Using transaction-level micro-data and information disclosure requirements, we provide extensive evidence consistent only with our theory of financial intermediation.