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A Market Based Solution for Fire Sales and Other Pecuniary Externalities

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  • Weerachart Kilenthong
  • Robert Townsend

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.
    • Handle: RePEc:pui:dpaper:23
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    4. Borys Grochulski & Yuzhe Zhang, 2019. "Optimal liquidity policy with shadow banking," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 68(4), pages 967-1015, November.
    5. UEDA Kenichi, 2019. "Speedy Bankruptcy Procedures and Bank Bailouts," Discussion papers 19108, Research Institute of Economy, Trade and Industry (RIETI).

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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;
    All these keywords.

    JEL classification:

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

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