Working Paper: CEPR ID: DP14014
Authors: Julien Hugonnier; Ben Lester; Pierre-Olivier Weill
Abstract: We study a search and bargaining model of asset markets in which investors’ heterogeneousvaluations for the asset are drawn from an arbitrary distribution. We present a solution techniquethat makes the model fully tractable, and allows us to provide a complete characterizationof the unique equilibrium, in closed-form, both in and out of steady-state. Using this characterization,we derive several novel implications that highlight the important of heterogeneity. Inparticular, we show how some investors endogenously emerge as intermediaries, even thoughthey have no advantage in contacting other agents or holding inventory; and we show howheterogeneity magnifies the impact of search frictions on asset prices, misallocation, andwelfare.
Keywords: search frictions; bargaining; heterogeneity; price dispersion
JEL Codes: G11; G12; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| heterogeneity (D29) | emergence of intermediaries (D40) |
| heterogeneity (D29) | impact of search frictions on asset prices (G19) |
| search frictions (F12) | asset prices (G19) |
| heterogeneity (D29) | misallocation (D61) |
| heterogeneity (D29) | welfare (I38) |