Valuation in Dynamic Bargaining Markets
45 Pages Posted: 12 Nov 2008
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Valuation in Dynamic Bargaining Markets
Valuation in Dynamic Bargaining Markets
Date Written: September 2001
Abstract
We study the impact on asset prices of illiquidity associated with search and bargaining in an economy in which agents can trade only when they find each other. Marketmakers' prices are higher and bid-ask spreads are lower if investors can find each other more easily. Prices become Walrasian as investors' or marketmakers' search intensities get large. Endogenizing search intensities yields natural welfare implications. Information can fail to be revealed through trading when search is difficult.
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