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Dark MarketsAsset Pricing and Information Transmission in Over-the-Counter Markets$
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Darrell Duffie

Print publication date: 2012

Print ISBN-13: 9780691138961

Published to Princeton Scholarship Online: October 2017

DOI: 10.23943/princeton/9780691138961.001.0001

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(p.27) Chapter 3 Search for Counterparties
Dark Markets

Darrell Duffie

Princeton University Press

This chapter introduces the modeling of search and random matching in large economies. The objective is to build intuition and techniques for later chapters. After some mathematical prerequisites, it defines the notion of random matching. It then invokes the law of large numbers to calculate the cross-sectional distribution of types of matches. This is extended to multiperiod search, first in discrete-time settings and then in continuous time. The optimal search intensity of a given agent, given the cross-sectional distribution of types in the population, is characterized with Bellman's principle. The chapter then briefly takes up the issue of equilibrium search efforts.

Keywords:   search models, random matching, Bellman's principle, equilibrium search, large numbers, over-the-counter market, OTC market

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