Decentralized Asset Markets with a Continuum of Types

We consider a decentralized market for an asset (or durable good) where the valuations of the agents in the market are heterogeneous and drawn from a continuous distribution. Agents can hold either zero or one unit of the asset, and they choose whether or not to search for a trading partner, which is costly. We provide a full characterization of the steady-state equilibrium, which allows us to study market composition (i.e., who searches and who doesn’t), the joint distribution of valuations and asset holdings (i.e., the degree of misallocation), trading volume and asset turnover (i.e., the amount of endogenous intermediation), asset prices and dispersion across trades, and several other important properties of over-the-counter markets. We also provide closed-form solutions as trading frictions vanish. We show that, while prices and allocations converge to those of the frictionless counterpart, excess trading volume persists in the asymptotic limit.