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Why Rent When You Can Buy?

Author

Listed:
  • Cyril Monnet
  • Borghan N. Narajabad

Abstract

Using a model with bilateral trades, we explain why agents prefer to rent the goods they can afford to buy. Absent bilateral trading frictions, renting has no role even with uncertainty about future valuations. With pairwise meetings, agents prefer to sell (or buy) durable goods whenever they have little doubt on the future value of the good. As uncertainty grows, renting becomes more prevalent. Pairwise matching alone is sufficient to explain why agents prefer to rent, and there is no need to introduce random matching, information asymmetries, or other market frictions.

Suggested Citation

  • Cyril Monnet & Borghan N. Narajabad, 2017. "Why Rent When You Can Buy?," Finance and Economics Discussion Series 2017-094, Board of Governors of the Federal Reserve System (US).
  • Handle: RePEc:fip:fedgfe:2017-94
    DOI: 10.17016/FEDS.2017.094
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    File URL: https://www.federalreserve.gov/econres/feds/files/2017094pap.pdf
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    References listed on IDEAS

    as
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    3. Florian Madison, 2016. "Asymmetric information in frictional markets for liquidity: collateralized credit vs asset sale," ECON - Working Papers 220, Department of Economics - University of Zurich, revised Sep 2017.
    4. Piero Gottardi & Vincent Maurin & Cyril Monnet, 2019. "A theory of repurchase agreements, collateral re-use, and repo intermediation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 30-56, July.
    5. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    6. Alessandro Gavazza & Alessandro Lizzeri & Nikita Roketskiy, 2014. "A Quantitative Analysis of the Used-Car Market," American Economic Review, American Economic Association, vol. 104(11), pages 3668-3700, November.
    7. Timothy J. Kehoe & David K. Levine, 2008. "Bankruptcy and Collateral in Debt Constrained Markets," Chapters,in: Macroeconomics in the Small and the Large, chapter 5 Edward Elgar Publishing.
    8. Ewerhart, Christian & Tapking, Jens, 2008. "Repo markets, counterparty risk and the 2007/2008 liquidity crisis," Working Paper Series 909, European Central Bank.
    9. Jeffrey Lacker, 2001. "Collateralized Debt as the Optimal Contract," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 842-859, October.
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    More about this item

    Keywords

    Bargaining ; Bilateral matching ; Over-the-counter market ; Rent ; Repo ; Security lending ; Directed search;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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