Cournot Fire Sales

Thomas Eisenbach and Gregory Phelan

No 2018-01, Department of Economics Working Papers from Department of Economics, Williams College

Abstract: In standard Walrasian macro-finance models, pecuniary externalities such as fire sales lead to overinvestment in illiquid assets or underprovision of liquidity. We investigate whether imperfect competition (Cournot) improves welfare through internalizing the externality and find that this is far from guaranteed. In a standard model of liquidity shocks, when liquidity is sufficiently scarce, Cournot competition leads to even less liquidity than the Walrasian equilibrium. In a standard model of productivity shocks, the Cournot equilibrium over-corrects for the fire-sale externality and holds less capital than socially efficient. Implications for welfare and regulation therefore depend highly on the nature of the shocks and the competitiveness of the industry considered.

Keywords: liquidity; fire sales; overinvesment; financial regulation; macroprudential regulation (search for similar items in EconPapers)
JEL-codes: D43 D62 E44 G18 G21 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2018-02
New Economics Papers: this item is included in nep-ban and nep-mac
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Related works:
Journal Article: Cournot Fire Sales (2022)
Working Paper: Cournot Fire Sales (2020)
Working Paper: Cournot Fire Sales (2018)
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