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Why Rent When You Can Buy?

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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 (U.S.).
    • Handle: RePEc:fip:fedgfe:2017-94
    DOI: 10.17016/FEDS.2017.094
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    References listed on IDEAS

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    7. Ewerhart, Christian & Tapking, Jens, 2008. "Repo markets, counterparty risk and the 2007/2008 liquidity crisis," Working Paper Series 909, European Central Bank.
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    Cited by:

    1. Liu, Zehao & Sinclair, Andrew J., 2022. "Wealth, endogenous collateral quality, and financial crises," Journal of Economic Theory, Elsevier, vol. 204(C).
    2. repec:upd:utppwp:026 is not listed on IDEAS
    3. Madison, Florian, 2024. "Asymmetric information in frictional markets for liquidity: Collateralized credit vs asset sale," Journal of Economic Dynamics and Control, Elsevier, vol. 159(C).
    4. repec:upd:utppwp:014 is not listed on IDEAS
    5. repec:upd:utppwp:005 is not listed on IDEAS
    6. repec:upd:utppwp:037 is not listed on IDEAS
    7. Hajime Tomura, 2012. "On the Existence and Fragility of Repo Markets," Staff Working Papers 12-17, Bank of Canada.
    8. Yu Awaya & Hiroki Fukai & Makoto Watanabe, 2021. "A Model Of Collateral: Endogenizing The Borrowing Constraint," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(3), pages 1131-1151, August.

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    More about this item

    Keywords

    Bargaining; Bilateral matching; Over-the-counter market; Rent; Repo; Security lending; Directed search;
    All these keywords.

    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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