American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Cournot Fire Sales
American Economic Journal: Macroeconomics
vol. 14,
no. 3, July 2022
(pp. 508–42)
Abstract
In standard Walrasian macro-finance models, pecuniary externalities due to fire sales lead to excessive borrowing and insufficient liquidity holdings. We investigate whether imperfect competition (Cournot) improves welfare through internalizing the externality and find that this is far from guaranteed. Cournot competition can overcorrect the inefficiently high borrowing in a standard model of levered real investment. By contrast, Cournot competition can exacerbate the inefficiently low liquidity in a standard model of financial portfolio choice. Implications for welfare and regulation are therefore sector specific, depending both on the nature of the shocks and the competitiveness of the industry.Citation
Eisenbach, Thomas M., and Gregory Phelan. 2022. "Cournot Fire Sales." American Economic Journal: Macroeconomics, 14 (3): 508–42. DOI: 10.1257/mac.20200283Additional Materials
JEL Classification
- D43 Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
- D62 Externalities
- E44 Financial Markets and the Macroeconomy
- G11 Portfolio Choice; Investment Decisions
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G28 Financial Institutions and Services: Government Policy and Regulation
- G30 Corporate Finance and Governance: General
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