Why Rent When You Can Buy?
FEDS Working Paper No. 2017-094
57 Pages Posted: 28 Sep 2017
Date Written: September 6, 2017
Using a model with bilateral trades, we explain why agents prefer to rent the goods they can afford to buy. Absent bilateral trading frictions, renting has no role even with uncertainty about future valuations. With pairwise meetings, agents prefer to sell (or buy) durable goods whenever they have little doubt on the future value of the good. As uncertainty grows, renting becomes more prevalent. Pairwise matching alone is sufficient to explain why agents prefer to rent, and there is no need to introduce random matching, information asymmetries, or other market frictions.
Keywords: Bargaining, Bilateral matching, Over-the-counter market, Rent, Repo, Security lending, directed search
JEL Classification: G11,E44,C78
Suggested Citation: Suggested Citation