We study the impact on asset prices of illiquidity associated with search and bargaining in an economy in which agents can trade only when they find each other. Marketmakers' prices are higher and bid-ask spreads are lower if investors can find each other more easily. (...)

As risk aversion approaches infinity, the portfolio of an investor with utility over consumption at time T is shown to converge to the portfolio consisting entirely of a bond maturing at time T. Previous work on bond allocation requires a specific model for equities, the term structure, and the...