| Abstract: | Markets for many real assets are characterized by sequentialsearch followed by bilateral bargaining between matched buyersand sellers. For a category of real assets, the joint, intertemporalvaluation problems of buyers, owners, and sellers and the associatedNash pricing function are solved explicity. In equilibrium,the average transaction price is a noisy, proportional randomwalk, and the liquidity premium is positive for matched owners.Depending on the values of the parameters, the liquidity ofoptimal development with costly search, the optimal exercisepoint, cost of development, and value of the undeveloped assetare calculated analytically. With search, development can occursooner and undeveloped assets have lower market values thanthe standard solution without search. |
