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, 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.