We introduce a new approach to bargaining, with both axiomatic and strategic foundations, into models of decentralized asset market. Gradual bargaining, which assumes that portfolios of assets are sold sequentially, one unit of asset at a time, has strong normative justifications: it increases the surplus of asset owners, it reduces asset misallocation, and it can implement first best. In the presence of multiple assets our theory generates a pecking order, a structure of asset returns based on asset negotiability, and differences in turnover. We apply our model to the study of open-market operations and the determination of the exchange rate in the presence of multiple (crypto-)currencies.
Fédération des Banques Françaises Research Initiative