PRICING REAL ASSETS WITH COSTLY SEARCH

Markets for many real assets are characterized by sequential search fo llowed by bilateral bargaining between matched buyers and sellers. For a category of real assets, the joint, intertemporal valuation problem s of buyers, owners, and sellers, and the associated Nash pricing func tion are solved explicitly. In equilibrium, the average transaction pr ice is a noisy, proportional random walk, and the liquidity premium is positive for matched owners. Depending on the values of the parameter s, the liquidity premium can be substantial. In a related problem of o ptimal development with costly search, the optimal exercise point, cos t of development, and value of the undeveloped asset are calculated an alytically. With search, development can occur sooner and undeveloped assets have lower market values than the standard solution without sea rch.