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.
Eisenbach, Thomas M., and Gregory Phelan.
"Cournot Fire Sales."
American Economic Journal: Macroeconomics,
Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
Financial Markets and the Macroeconomy
Portfolio Choice; Investment Decisions
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Financial Institutions and Services: Government Policy and Regulation
Corporate Finance and Governance: General