Why Rent When You Can Buy?

FEDS Working Paper No. 2017-094

57 Pages Posted: 28 Sep 2017

See all articles by Cyril Monnet

Cyril Monnet

Federal Reserve Bank of Philadelphia

Borghan Narajabad

Board of Governors of the Federal Reserve

Date Written: September 6, 2017

Abstract

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

Monnet, Cyril and Narajabad, Borghan, Why Rent When You Can Buy? (September 6, 2017). FEDS Working Paper No. 2017-094. Available at SSRN: https://ssrn.com/abstract=3044576 or http://dx.doi.org/10.2139/ssrn.3044576

Cyril Monnet

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Borghan Narajabad (Contact Author)

Board of Governors of the Federal Reserve ( email )

20th and C Streets, NW
Washington, DC 20551
United States

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