Dealer Funding and Market Liquidity

We analyze a model where dealers provide market liquidity by intermediating trades between clients. They exert unobservable search effort to improve intermediation profit. This moral-hazard friction limits their ability to raise external finance and compete with each other, constraining market liquidity even for safe assets and more so for those with higher search costs. Dealers mitigate this friction by using debt financing and intermediating across multiple markets, making leverage endogenous