A Market Based Solution to Price Externalities: A Generalized Framework / Weerachart T. Kilenthong, Robert M. Townsend.

Format:

Book

Author/Creator:

Kilenthong, Weerachart T.

Contributor:

National Bureau of Economic Research.

Townsend, Robert M.

Series:

Working Paper Series (National Bureau of Economic Research) no. w20275.

NBER working paper series no. w20275

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Market Based Solution to Price Externalities

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2014.

Summary:

Pecuniary externalities have regained the interest of researchers as they seek policy interventions and regulations to remedy externality-induced distortions, e.g., balance sheet effects, amplifiers and fire sales. In this paper we go back to first principles and show how to design financial contracts and markets in such a way that ex ante competition can achieve a constrained-efficient allocation. The key as in general equilibrium theory is to extend the commodity space in such a way that bundling, exclusivity and additional markets internalize these pecuniary externalities. We devise in this paper a general way of proceeding that covers as a general case the large variety of example-economies which differ from one another in the particular source of the constraint generating the externality. A key take away from our approach is that we do not need to identify and quantify some policy intervention. With the appropriate ex ante design we can let markets solve the problem.

Notes:

Print version record

July 2014.