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Rev Fin 1995; 8:55-90
© 1995 the Society for Financial Studies

Article

Pricing real assets with costly search

JT Williams
University of British Columbia

Abstract

Markets for many real assets are characterized by sequential search followed by bilateral bargaining between matched buyers and sellers. For a category of real assets, the joint, intertemporal valuation problems of buyers, owners, and sellers and the associated Nash pricing function are solved explicity. In equilibrium, the average transaction price is a noisy, proportional random walk, and the liquidity premium is positive for matched owners. Depending on the values of the parameters, the liquidity of optimal development with costly search, the optimal exercise point, cost of development, and value of the undeveloped asset are calculated analytically. With search, development can occur sooner and undeveloped assets have lower market values than the standard solution without search.


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