Gradual Bargaining in Decentralized Asset Markets

Tai-Wei Hu, Guillaume Rocheteau, Lucie Lebeau and Younghwan In
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Tai-Wei Hu: University of Bristol
Guillaume Rocheteau: University of California, Irvine
Lucie Lebeau: UC Irvine
Younghwan In: KAIST

No 606, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: We introduce a new approach to bargaining into a model of decentralized asset market with unrestricted portfolios. Gradual bargaining (O’Neill et al., 2004) captures the idea that portfolios of assets are sold sequentially, one unit of asset at a time. In contrast to Nash or Kalai solutions, it is both monotone and ordinal. Moreover, gradual bargaining reduces asset misallocation in decentralized markets and can implement first best with or without endogenous participation. We generalize the solution to allow for time-varying bargaining powers and time-intensive technologies to negotiate assets thereby capturing the notion of asset negotiability, i.e., some assets can take longer than others to negotiate due to their complexity. The model can explain the rate-of-return-dominance puzzle.

Date: 2018
New Economics Papers: this item is included in nep-gth
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