DP10546 An Empirical Equilibrium Model of a Decentralized Asset Market

Author(s): Alessandro Gavazza
Publication Date: April 2015
Keyword(s): bargaining, intermediaries, search markets
JEL(s): C78, D83, G12
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10546

I estimate a search-and-bargaining model of a decentralized market to quantify the effects of trading frictions on asset allocations, asset prices and welfare, and to quantify the effects of intermediaries that facilitate trade. Using business-aircraft data, I find that, relative to the Walrasian benchmark, 18.3 percent of the assets are misallocated; prices are 19.2-percent lower; and the aggregate welfare losses equal 23.9 percent. Dealers play an important role in reducing trading frictions: In a market with no dealers, a larger fraction of assets would be misallocated, and prices would be higher. Moreover, dealers reduce aggregate welfare because their operations are costly, and they impose a negative externality by decreasing the number of agents' direct transactions.