Transition dynamics in equilibrium search
Type :
Article
Access :
restrictedAccess
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.
Source :
American Economic Journal: Microeconomics
Date :
2022
Volume :
14
Issue :
4
Publisher :
American Economic Association
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