The next class of models stresses interactions between agents that reflect various forms of trading externalities. Here the linkages between agents do not arise directly in preferences or the production process but rather in the way agents come together to trade. Thus, these models rest firmly on the view that the Walrasian auctioneer does not function to bring together traders. Instead, trade frictions arise from the process of search and recruitment.

The complementarity in these models stems from the “thick market.” This is essentially a restriction on the relationship between trading costs and the level of economic activity. In particular, the economies we explore have the property that if there are many agents in the market searching for trading partners, then the returns to participating in the market are higher as a result of reduced costs of search. Thus thick market effects are just the opposite of congestion effects: the thicker the market the lower are trading costs.

AN EXAMPLE

The flavor of these models can be seen through a simple example of a participation complementarity. Denote by Z(p) the return to an individual from participating in an activity if a proportion, p, of others are participating. Assume that Z'(·) > 0 so that thicker markets are more desirable. The economics underlying this assumption will be the focus of the discussion to follow. Suppose that agent i's opportunity cost of participating is ki and that these costs are distributed across the population with a cumulative distribution function given by H(k), for k ε [0, 1].