Discussion paper

DP14014 Heterogeneity in Decentralized Asset Markets

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


Hugonnier, J, B Lester and P Weill (2019), ‘DP14014 Heterogeneity in Decentralized Asset Markets‘, CEPR Discussion Paper No. 14014. CEPR Press, Paris & London. https://cepr.org/publications/dp14014