Maryam Farboodi, Massachusetts Institute of Technology
Abstract: We ask whether concentrated market power can emerge in environments designed for perfect competition. Studying the Ethereum blockchain—a setting with permissionless entry and transparent rules—we show that centralization arises endogenously when information asymmetry interacts with risk-sharing. Using novel data distinguishing private from public order flow, a 1 percent increase in private information value causally increases intermediary profit shares by 0.57 percent. A dynamic bargaining model explains this as an equilibrium response: informed intermediaries gain rents by threatening to delay trade. Our results demonstrate how informational frictions alone can generate persistent oligopoly in frictionless digital markets.
Discussant: Michael Sockin, University of Texas-Austin
Abstract: A key function of government-sponsored enterprises (GSEs) is insuring mortgage default
risk, yet little is known about whether these guarantees are fairly priced. Using a
replicating portfolio and prices of reinsured mortgage default risk to value the cash flows
from these guarantees, I show GSEs shifted from providing a 20-bps subsidy pre-GFC
to earning risk-adjusted profits of 30-bps post-GFC. Following this increase, banks
reduce but still securitize a significant fraction of their mortgages through GSEs. At the
margin, more balance sheet-constrained lenders rely more heavily on GSE securitization.
These results imply that balance sheet constraints limit lenders’ ability to substitute
away from above-market GSE insurance prices.
Abstract: We document a negative correlation between macroeconomic uncertainty and analysts’ earnings forecast dispersion, driven by herding behavior that favors consensus over accuracy. This convergence transmits noisier signals and contributes to informational inefficiencies. Controlling for firm characteristics, we find that “herding firms”—those whose forecast dispersion declines with rising uncertainty—exhibit higher firm-level uncertainty, less informative stock prices, greater overpricing, and lower subsequent returns. By linking macro-level uncertainty to micro-level forecast behavior, our study highlights a behavioral transmission channel through which uncertainty amplifies psychological biases and distorts information processing. These findings offer new insight into micro-foundations of how uncertainty impairs market efficiency, complementing traditional risk-based explanations.
Discussant: Diego Garcia, University of Colorado-Boulder
