A Market Based Solution for Fire Sales and Other Pecuniary Externalities

75 Pages Posted: 7 Mar 2016

See all articles by Weerachart Kilenthong

Weerachart Kilenthong

University of the Thai Chamber of Commerce

Robert M. Townsend

Massachusetts Institute of Technology (MIT)

Date Written: March 2016

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

Kilenthong, Weerachart and Townsend, Robert M., A Market Based Solution for Fire Sales and Other Pecuniary Externalities (March 2016). NBER Working Paper No. w22056. Available at SSRN: https://ssrn.com/abstract=2743055

Weerachart Kilenthong (Contact Author)

University of the Thai Chamber of Commerce

Robert M. Townsend

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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