INDIVISIBLE ASSETS, EQUILIBRIUM, AND THE VALUE OF INTERMEDIATION

This paper considers a standard monetary economy with indivisible prim ary assets and transaction costs. When assets are indivisible, if a st eady-state equilibrium with positive savings exists, there necessarily exists a very large set of equilibria. The intermediation of indivisi ble assets sunstantially reduces the set of competitive equilibria, an d enhances the ''flexibility'' of prices. We state sufficient conditio ns for intermediaries to form and hold all primary assets directly. We define and analyze various measures of the consumer surplus created b y intermediaries. We show that conventional measures of intermediary o utput bear no obvious relation to the consumer surplus created by inte rmediation. (C) 1995 Academic Press, Inc.