How I Learned to Stop Worrying and Love Fire Sales
NBER Working Paper No. 24752
In canonical models with financial constraints, the possibility of fire sales creates a pecuniary externality that results in ex-ante overinvestment. I show that this result is sensitive to the microfoundations for fire sales. If they result from asymmetric information instead of misallocation, the overinvestment result is reversed. Macroprudential policy may therefore need to treat different types of investment differently.
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Document Object Identifier (DOI): 10.3386/w24752