“Intermediation and Risk Aversion” by Hon Sing LEE
Hon Sing LEE
Nanyang Business School
This paper proves that a monopolistic intermediary extracts rents from the risk aversion of traders. The rents, however, reach full monopolistic levels only if the traders' certainty equivalence equals to the wealth of the worst outcome scenario. Not all infinitely risk averse traders would pay such a high risk premium. Hence the intermediary is not always able to extract full monopolistic rents. The change in volume of trade intermediated as risk aversion increases depends on how the risk premium grows. The change in volume may decrease, be constant, or switches from decreasing to increasing.