An Empirical Equilibrium Model of a Decentralized Asset Market

I estimate a search-and-bargaining model of a decentralized market to quantify the effects of trading frictions on asset allocations and asset prices, and to quantify the effects of intermediaries that facilitate trade. Using business-aircraft data, I find that, relative to the Walrasian benchmark, 12 percent of the assets are misallocated, and prices are approximately 24.5-percent lower. Dealers play an important role in reducing frictions: In a market with no dealers, 15.2 percent of the assets would be misallocated. Perhaps surprisingly, in a market with no dealers, prices would increase by 1.7 percent, because sellers’ outside options improve relative to buyers’, thus counteracting the effects of higher search costs and slower trade on asset prices. I am grateful to Ricardo Lagos, Jonathan Levin, Gianluca Violante, Pierre-Olivier Weill and many seminar audiences for useful comments and discussions. Leonard N. Stern School of Business, New York University. 44 West 4th Street, New York, NY 10012. Telephone: (212) 998-0959. Fax: (212) 995-4218. Email: [email protected].