The aim of this paper is to analyze how the market embeddedness in personal relations affects equilibrium prices and agents' values. To this purpose, we analyze a decentralized market where agents randomly meet and bargain over the terms of trade. We model the underlying structure of personal connections as a stochastic matching process. Such stochastic matching technology constitutes a rich framework that embodies a huge variety of trading links. We first show that the Rubinstein stochastic bargaining game of price formation has a unique Markov perfect equilibrium outcome, highly dependent on the meeting probabilities. We then analyze the impact of different patterns of trading links (corresponding to different stochastic technologies) on market variables. We show in particular that equilibrium prices are negatively correlated with the probability to transact again and analyze when the establishment of regular trading relationships is mutually beneficial. © 2002 Elsevier Science B.V. All rights reserved.
|Journal||Mathematical Social Sciences|
|Publication status||Published - 1 Feb 2003|
- Decentralized market
- Markov perfect equilibrium
- Nonccoperative bargaining
- Stochastic matching