A Market Based Solution for Fire Sales and Other Pecuniary Externalities

Weerachart Kilenthong and Robert Townsend

No 22056, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show how bundling, exclusivity and additional markets internalize fire sale and other pecuniary externalities. Ex ante competition can achieve a constrained efficient allocation. The solution can be put rather simply: create segregated market exchanges which specify prices in advance and price the right to trade in these markets so that participant types pay, or are compensated, consistent with the market exchange they choose and that type's excess demand contribution to the price in that exchange. We do not need to identify and quantify some policy intervention. With the appropriate ex ante design we can let markets solve the problem.

JEL-codes: D52 D53 D61 D62 (search for similar items in EconPapers)
Date: 2016-03
New Economics Papers: this item is included in nep-com, nep-ifn and nep-reg
Note: DEV IFM
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Citations: View citations in EconPapers (2)

Published as Weerachart T. Kilenthong & Robert M. Townsend, 2021. "A Market-Based Solution for Fire Sales and Other Pecuniary Externalities," Journal of Political Economy, vol 129(4), pages 981-1010.

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Working Paper: A Market Based Solution for Fire Sales and Other Pecuniary Externalities (2016)
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