Asset liquidity and indivisibility

Abstract

We study asset liquidity in a search-theoretic framework where divisible assets can facilitate exchange for an indivisible consumption good. The distinctive characteristics of our theory are that the asset dividend can be either positive or negative and buyers can choose whether or not to carry the asset and trade for the indivisible good. Buyers’ participation determines the demand for asset liquidity. Thus, the asset price carries a liquidity premium component which reflects the function of the asset in facilitating trade. The economy features multiple equilibria when the asset dividend is negative, due to the trade-off between the probability of trade and the endogenous cost of holding assets.