Staff Reports
Cournot Fire Sales
Previous title: “Cournot Fire Sales in Real and Financial Markets”
Number 837
February 2018 November 2020

JEL classification: D43, D62, E44, G18, G21

Authors: Thomas M. Eisenbach and Gregory Phelan

In standard Walrasian macro-finance models, pecuniary externalities due to fire sales lead to excessive borrowing and insufficient liquidity holdings. We investigate whether imperfect competition (Cournot) improves welfare through internalizing the externality and find that this is far from guaranteed. Cournot competition can overcorrect the inefficiently high borrowing in a standard model of levered real investment. In contrast, Cournot competition can exacerbate the inefficiently low liquidity in a standard model of financial portfolio choice. Implications for welfare and regulation are therefore sector-specific, depending both on the nature of the shocks and the competitiveness of the industry.

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Author Disclosure Statement(s)
Thomas Eisenbach
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

Gregory Phelan
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
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