Size of Middleman in a Barter Economy Preliminary Paper

This paper develops a model of intermediation in search environment with complete information and explains the optimal choice of the size of a middleman in an economy with an arbitrary finite number of goods. The model with linear storage cost predicts the existence of stationary equilibrium with the same number of shelves in every store and uniform distribution of agents over states. The efficiency consideration shows that the market might not create enough intermediaries in the economy allowing for Pareto improving government intervention. The paper elaborates very useful framework for further extensions of the problem. ∗I am very grateful to Randall Wright, Ruilin Zhou, Andrew Postlewaite and Neil Wallace for many valuable suggestions and comments. All remaining mistakes are mine.