A Market-Based Solution for Fire Sales and Other Pecuniary Externalities

Journal Article
Published on 1 January 2021

Working paper available through PEDL. Article forthcoming.

Abstract

In economies with a continuum of agents of different types, pecuniary externalities are removed with market exchanges. Agents choose from among various possible prices they want to prevail in the future and buy or sell rights in these market exchanges for future trade. Each agent can choose the exchange it wants without regard to what any other agent is doing. But crucially, the right to trade in each and every exchange is priced. The fee structure has a per unit price and quantity decompostion: a price, as determined by the exchange chosen, times the quantity of rights acquired.

Authors

Weerachart T. Kilenthong

University of the Thai Chamber of Commerce

Robert M. Townsend

Massachusetts Institute of Technology