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An Equilibrium Search Model of Fire Sales

Author

Listed:
  • Brennan Platt

    (Brigham Young University)

  • Nuray Akin

    (Ozyegin University, School of Business)

Abstract

This paper presents a novel approach to the theory of fire sales, where an asset is sold for a price below its fundamental value. Specifically, we model the “urgency to sell” motivation that pushes some unlucky sellers in the market to become anxious (desperate) about liquidating their asset because failing to do so would cause them to incur a cost. Homogenous buyers strategically choose when to enter the market and what price to offer, knowing that some sellers are more motivated, but do not know the type of the seller they meet. We characterize equilibrium prices in this economy both in the steady state and on the transition path as the economy converges to a new steady state after a permanent demand shock. We find that prices oscillate, rather than monotonically converging to the steady state. Moreover, the dynamic behavior of prices indicate overshooting, where sometimes prices fall below their long run equilibrium value and rise above it, depending on the proportion of desperate to relaxed sellers as well as the number of buyers that would clear the market.

Suggested Citation

  • Brennan Platt & Nuray Akin, 2017. "An Equilibrium Search Model of Fire Sales," 2017 Meeting Papers 949, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:949
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    File URL: https://economicdynamics.org/meetpapers/2017/paper_949.pdf
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    References listed on IDEAS

    as
    1. S. Nuray Akin & Brennan Platt, 2012. "Running Out of Time: Limited Unemployment Benefits and Reservation Wages," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 149-170, April.
    2. Ş. Akın & Brennan Platt, 2014. "A theory of search with deadlines and uncertain recall," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(1), pages 101-133, January.
    3. Michael A. Arnold, 1999. "Search, Bargaining and Optimal Asking Prices," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(3), pages 453-481, September.
    4. John Y. Campbell & Stefano Giglio & Parag Pathak, 2011. "Forced Sales and House Prices," American Economic Review, American Economic Association, vol. 101(5), pages 2108-2131, August.
    5. James Albrecht & Axel Anderson & Eric Smith & Susan Vroman, 2007. "Opportunistic Matching In The Housing Market," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(2), pages 641-664, May.
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