Cournot Fire Sales

Thomas Eisenbach and Gregory Phelan

No 2020-10, Department of Economics Working Papers from Department of Economics, Williams College

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 external- ity 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 there- fore sector-specific, depending both on the nature of the shocks and the competitive- ness of the industry.

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: 53 pages
Date: 2020-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-com and nep-mac
Note: This is a revised version of paper 2018-01.
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Cournot Fire Sales (2022)
Working Paper: Cournot Fire Sales (2018)
Working Paper: Cournot Fire Sales (2018)
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