Transition Dynamics in Equilibrium Search

Ş. Nuray Akın and Brennan Platt

American Economic Journal: Microeconomics, 2022, vol. 14, issue 4, 158-99

Abstract: We study a dynamic equilibrium search model where sellers differ in their urgency to liquidate an asset. Buyers strategically make price offers without knowing a given seller's urgency. We study liquidity and price dynamics on the transition path after an unexpected shock. Generically, the transition includes a phase where all buyers offer the same price, causing a market collapse; however, price dispersion resumes in finite time, leading to a recovery where both types make sales. We show that prices and liquidity can overshoot before converging to the steady state. When relaxed sellers randomly become desperate, dampening oscillations can occur.

JEL-codes: C73 D11 D83 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1257/mic.20200227

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