NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Eduardo Dávila

Stern School of Business
New York University
44 West 4th Street
New York, NY 10012

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NBER Program Affiliations: AP
NBER Affiliation: Faculty Research Fellow

NBER Working Papers and Publications

July 2016Pecuniary Externalities in Economies with Financial Frictions
with Anton Korinek: w22444
This paper characterizes the efficiency properties of competitive economies with financial constraints, in which phenomena such as fire sales and financial amplification may arise. We show that financial constraints lead to two distinct types of pecuniary externalities: distributive externalities that arise from incomplete insurance markets and collateral externalities that arise from price-dependent financial constraints. For both types of externalities, we identify three sufficient statistics that determine optimal taxes on financing and investment decisions to implement constrained efficient allocations. We also show that fire sales and financial amplification are neither necessary nor sufficient to generate inefficient pecuniary externalities. We demonstrate how to employ our framework...
 
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