Heterogeneity in Decentralized Asset Markets

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 importance 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 Classification: G11, G12, G21