Cournot Fire Sales
Thomas M. Eisenbach
- American Economic Journal: Macroeconomics (Forthcoming)
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.
In 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.
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