Essays on Models of Decentralized Markets
- Author(s): Lebeau, Lucie
- Advisor(s): Rocheteau, Guillaume
- et al.
This dissertation studies models of decentralized markets with search and bargaining. Chapters 1, 3, and 4 respectively examine applications to over-the-counter asset markets, the labor and credit markets, and the transmission of contagious diseases through social and economic interactions. Chapter 2 develops a novel bargaining framework to model bilateral negotiations in decentralized asset markets.
Chapter 1 formalizes a Nash bargaining game between two players constrained by capacity decisions made prior toentering the negotiation. In equilibrium, strategic interactions drive capacity choices to zero and shut trade down despite the existence of gains from trade. The game is embedded in a general equilibrium model of decentralized asset trade with credit frictions to investigate the interaction between availability of credit and investors' participation, modeled through their choices of inventory and payment capacity. A partial access to credit is sufficient to restore trade. The strategic interactions between payment capacity and inventory generate endogenous heterogeneity in holdings, trade sizes and prices, and complementarity between money and credit.
Chapter 2 develops a new approach to bargaining, with strategic and axiomatic foundations, into models of decentralized asset markets. According to this approach, which encompasses the Nash (1950) solution as a special case, bilateral negotiations follow an agenda that partitions assets into bundles to be sold sequentially. We construct two alternating-offer games consistent with this approach and characterize their subgame-perfect equilibria. We show the revenue of the asset owner is maximized when assets are sold one infinitesimal unit at a time. In a general equilibrium model with endogenous asset holdings, gradual bargaining reduces asset misallocation and prevents market breakdowns.
Chapter 3 examines the deterioration of credit availability as a novel explanation for the outwards shift of the Beveridge curve in the US following the Great Recession. The model implements a twist in Wasmer and Weil (2004): instead of looking for a loan to finance their vacancy costs, firms borrow to cover a fixed cost of hiring required to convert a match into a hire. This timing allows labor market efficiency to drop following a productivity shock. I build a monthly index of loan approval and conduct an empirical exercise that confirms the relevance of the credit channel.
Chapter 4 studies the endogenous spread of an infectious disease in a random matching model with pairwise meetings, where economic and social gains arise explicitly from person-to-person contacts. When agents can decide whether to engage in interactions, complementarities in the participation decisions of individuals susceptible to contracting thedisease generate a large multiplicity of equilibria through adverse selection. The lower the participation of susceptible agents, the higher the prevalence of infection in the pool of participants, further discouraging the participation of susceptible agents. I document a variety of infection dynamics, including plateaus and multiple waves. Adverse selection leads to too much isolation from susceptible agents, and in the calibrated version of the model, the cost of forgone interactions offsets the welfare gains of flattening the curve and mitigating the human toll. When agents cannot opt out of the market but can instead choose whether to wear a mask, the equilibrium is unique. In the calibrated model the human toll is lower than when considering the participation margin, yet at a significantly smaller cost.