By Alessandro Gavazza
I estimate a search-and-bargaining model of a decentralized market to quantify the effects of trading frictions on asset allocations, asset prices and welfare, and to quantify the effects of intermediaries that facilitate trade. Using business-aircraft data, I find that, relative to the Walrasian benchmark, 18.3 percent of the assets are misallocated; prices are 19.2-percent lower; and the aggregate welfare losses equal 23.9 percent. Dealers play an important role in reducing trading frictions: In a market with no dealers, a larger fraction of assets would be misallocated, and prices would be higher. However, dealers reduce aggregate welfare because their operations are costly, and they impose a negative externality by decreasing the number of agents’ direct transactions.
That is a pretty cool paper, especially in the current debate about what added value financial brokers and wealth managers actually bring to the table. For this reason, I would have preferred a title like “Do Asset Dealers Contribute to Aggregate Welfare?” Readership would then be an order of magnitude larger.