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A Market Based Solution for Fire Sales and Other Pecuniary Externalities

Author

Listed:
  • Weerachart Kilenthong

    (University of the Thai Chamber of Commerce)

  • Robert Townsend

    (University of Chicago)

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.

Suggested Citation

  • Weerachart Kilenthong & Robert Townsend, 2016. "A Market Based Solution for Fire Sales and Other Pecuniary Externalities," PIER Discussion Papers 23., Puey Ungphakorn Institute for Economic Research, revised Apr 2016.
  • Handle: RePEc:pui:dpaper:23.
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    References listed on IDEAS

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    More about this item

    Keywords

    price externalities; segregated exchanges; Walrasian equilibrium; markets for rights to trade; market-based solution; collateral; exogenous in complete markets; resales.;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D6 - Microeconomics - - Welfare Economics

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