Working Paper: CEPR ID: DP14274
Authors: Julien Hugonnier; Benjamin Lester; Pierre-Olivier Weill
Abstract: We study a search and bargaining model of asset markets in which investors’ heterogeneous valuations for the asset are drawn from an arbitrary distribution. We present a solution technique that makes the model fully tractable, and allows us to provide a complete characterization of 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. In particular, we show how some investors endogenously emerge as intermediaries, even though they have no advantage in contacting other agents or holding inventory; and we show how heterogeneity magnifies the impact of search frictions on asset prices, misallocation, and welfare.
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 in investor valuations (G19) | emergence of intermediaries (D40) |
| heterogeneity (D29) | asset prices (G19) |
| heterogeneity (D29) | misallocation (D61) |
| heterogeneity (D29) | welfare (I38) |
| search frictions (F12) | trading volume (G15) |
| search frictions (F12) | price levels (E30) |
| heterogeneity (D29) | impact of search frictions on asset prices (G19) |
| heterogeneity (D29) | impact of search frictions on misallocation (D61) |
| heterogeneity (D29) | impact of search frictions on welfare (D69) |