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Heterogeneity in decentralized asset markets

Author

Listed:
  • Lester, Benjamin

    (Research Department, Federal Reserve Bank of Philadelphia)

  • Weill, Pierre-Olivier

    (Department of Economics, University of California, Los Angeles)

  • Hugonnier, Julien

    (Department of Finance, Ecole Polytechnique Fédérale de Lausanne)

Abstract

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.

Suggested Citation

  • Lester, Benjamin & Weill, Pierre-Olivier & Hugonnier, Julien, 2022. "Heterogeneity in decentralized asset markets," Theoretical Economics, Econometric Society, vol. 17(3), July.
    • Handle: RePEc:the:publsh:4796
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    More about this item

    Keywords

    Over-the-counter markets; search frictions; bargaining; heterogeneity; price dispersion;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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