An Empirical Equilibrium Model of a Decentralized Asset Market. Issue 5 (September 2016)

• Record Type: Journal Article
• Authors: Gavazza, Alessandro
• Is Part Of: Econometrica. Volume 84:Issue 5(2016:Sep.)
• Page Start: 1755
• Page End: 1798
• Publication Date: 2016-09
• Subjects: Search frictions -- intermediaries -- bargaining; Econometrics -- Periodicals; Economics, Mathematical -- Periodicals; Economics -- Periodicals; Économétrie -- Périodiques; Mathématiques économiques -- Périodiques; Économie politique -- Périodiques; 330.05
• DOI: 10.3982/ECTA10847
• Languages: English
• ISSNs: 0012-9682

Abstract

Abstract : 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. However, dealers reduce aggregate welfare because their operations are costly, and they impose a negative externality by decreasing the number of agents' direct transactions.