Inefficient Fire-Sales in Decentralized Asset Markets

Classic models of fire-sales that emphasize liquidity-constrained natural buyers can-notfully account for the asset fire-sales during the Financial Crisis of 2008. I present a modelto demonstrate that fire-sales may happen even when there is a sizable pool of naturalbuyers and in the absence of asymmetric information, due to a coordina-tion failureamong buyers. In particular, I show that when trade is decentralized and participation isendogenous, constrained asset demand and liquidity needs that are ex-pected to increaseover time create complementarity among buyers' decisions to wait. This complementaritymakes competitive markets prone to coordination failures and fire-sales which may beinefficient. I also discuss various policy options to eliminate the risk of fire-sales in such asetup