Cournot Fire Sales

Thomas Eisenbach and Gregory Phelan

No 837, Staff Reports from Federal Reserve Bank of New York

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. 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.

Keywords: liquidity; fire sales; overinvestment; financial regulations; macroprudential regulations (search for similar items in EconPapers)
JEL-codes: D43 D62 E44 G18 G21 (search for similar items in EconPapers)
Pages: 54
Date: 2018-02-01
New Economics Papers: this item is included in nep-ban and nep-mac
Note: Revised November 2020. Previous title: “Cournot Fire Sales in Real and Financial Markets”
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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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