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Information, Nonexcludability, and Financial Market Structure

We study the determinants of market structure in financial intermediation markets. We establish that the input of intermediation services-information-is always non-excludable (though not necessarily non-rival), and intermediaries cannot establish property rights over it. We show that non-excludability is the main determinant of market structure, and present a theory in which market structure, margins, and employees' wages are endogenously determined. The models we study generate the following results: (1) Intermediaries' margins are lower in more concentrated markets. (2) There cannot exist a single dominant intermediary in equilibrium; rather, intermediaries must be few and of similar sizes. (3) Even in the absence of entry costs required to become established in the market, intermediaries may still make profits in equilibrium. (4) Increases in the size of the market may have no effect on market concentration. (5) Lower entry costs may result in more concentrated markets. (6) In intermediation markets, employees earn a wage premium unrelated to moral hazard. (7) Wages are higher in more concentrated intermediation markets, ceteris paribus. We examine in detail two markets-investment banking and venture capital- and show that the theory is consistent with the evidence.