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How I Learned to Stop Worrying and Love Fire Sales

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  • Pablo Kurlat

Abstract

In canonical models with financial constraints, the possibility of fire sales creates a pecuniary externality that results in ex-ante overinvestment. I show that this result is sensitive to the microfoundations for fire sales. If they result from asymmetric information instead of misallocation, the overinvestment result is reversed. Macroprudential policy may therefore need to treat different types of investment differently.

Suggested Citation

  • Pablo Kurlat, 2018. "How I Learned to Stop Worrying and Love Fire Sales," NBER Working Papers 24752, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24752
    Note: EFG
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    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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