Cournot Fire Sales

Thomas Eisenbach and Gregory Phelan

American Economic Journal: Macroeconomics, 2022, vol. 14, issue 3, 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.

JEL-codes: D43 D62 E44 G11 G21 G28 G30 (search for similar items in EconPapers)
Date: 2022
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Related works:
Working Paper: Cournot Fire Sales (2020)
Working Paper: Cournot Fire Sales (2018)
Working Paper: Cournot Fire Sales (2018)
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DOI: 10.1257/mac.20200283

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