Heterogeneity in decentralized asset markets

We study a canonical model of decentralized exchange for a durable good or asset, where agents are assumed to have time-varying, heterogeneous utility types. Whereas the existing literature has focused on the special case of two types, we allow agents' utility to be drawn from an arbitrary dist...

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Bibliographic Details
Published inTheoretical economics Vol. 17; no. 3; pp. 1313 - 1356
Main Authors Hugonnier, Julien, Lester, Benjamin, Weill, Pierre-Olivier
Format Journal Article
LanguageEnglish
Published New Haven, CT The Econometric Society 01.07.2022
John Wiley & Sons, Inc
Subjects
Assets
Bargaining
Bond markets
Decentralization
Durable goods
Economic theory
Equilibrium
G11
G12
G21
heterogeneity
Inventory
Markets
Over-the-counter markets
Preferences
price dispersion
Price levels
search frictions
Welfare
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Summary:We study a canonical model of decentralized exchange for a durable good or asset, where agents are assumed to have time-varying, heterogeneous utility types. Whereas the existing literature has focused on the special case of two types, we allow agents' utility to be drawn from an arbitrary distribution. Our main contribution is methodological: we provide a solution technique that delivers a complete characterization of the equilibrium, in closed form, both in and out of the steady state. This characterization offers a richer framework for confronting data from real-world markets, and reveals a number of new economic insights. In particular, we show that heterogeneity magnifies the impact of frictions on equilibrium outcomes, and that this impact is more pronounced on price levels than on price dispersion and welfare.
ISSN:1555-7561
1933-6837
1555-7561
DOI:10.3982/TE4796