TY - JOUR
T1 - Search at the margin
AU - Carrasco, José A.
AU - Smith, Lones
N1 - Funding Information:
* Carrasco: 2640 Diagonal Las Torres, Santiago, Chile (email: [email protected]); Smith: 1180 Observatory Drive, Madison, WI 53706–1393 (email: [email protected]). This paper was accepted to the AER under the guidance of John Leahy, Coeditor. The first version of this paper was called “The Search for Liquidity.” We have profited from feedback from the Midwest Economic Theory Conferences at Kansas and Ohio State, and seminars at Wisconsin, Notre Dame, Norwegian Business School, Leicester, Bucknell, and Pontificia Universidad Católica de Chile. We thank two anonymous referees for helpful comments and suggestions, and Dean Corbae and Georgy Egorov for useful feedback. The authors declare that they have no relevant or material financial interests that relate to the research described in this paper. Lones thanks the National Science Foundation for funding.
PY - 2017/10
Y1 - 2017/10
N2 - We extend search theory to multiple indivisible units and perfectly divisible assets, solving them respectively with induction and recursion. Buyer demands and prices are random, and the seller can partially exercise orders. With divisible assets, the Bellman value function is increasing and strictly concave, and the optimal reservation price falls in the position, reflecting increasing holding costs (opportunity cost of delaying optionality for inframarginal units). The marginal value exists, and is strictly convex with a falling purchase cap density. Our model is amenable to price-quantity bargaining; e.g., greater buyer bargaining power is tantamount to greater search frictions.
AB - We extend search theory to multiple indivisible units and perfectly divisible assets, solving them respectively with induction and recursion. Buyer demands and prices are random, and the seller can partially exercise orders. With divisible assets, the Bellman value function is increasing and strictly concave, and the optimal reservation price falls in the position, reflecting increasing holding costs (opportunity cost of delaying optionality for inframarginal units). The marginal value exists, and is strictly convex with a falling purchase cap density. Our model is amenable to price-quantity bargaining; e.g., greater buyer bargaining power is tantamount to greater search frictions.
UR - http://www.scopus.com/inward/record.url?scp=85030663497&partnerID=8YFLogxK
U2 - 10.1257/aer.20151579
DO - 10.1257/aer.20151579
M3 - Article
AN - SCOPUS:85030663497
SN - 0002-8282
VL - 107
SP - 3146
EP - 3181
JO - American Economic Review
JF - American Economic Review
IS - 10
ER -