An Empirical Equilibrium Model of a Decentralized Asset Market

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. * I am grateful to Ricardo Lagos, Jonathan Levin, Gianluca Violante, Pierre-Olivier Weill, the co-editor and two anonymous referees, and many seminar audiences for useful comments and discussions. Mi Luo provided excellent research assistance.

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