Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Why Rent When You Can Buy?
Using a model with bilateral trades, we explain why agents prefer to rent the goods they can afford to buy. Absent bilateral trading frictions, renting has no role even with uncertainty about future valuations. With pairwise meetings, agents prefer to sell (or buy) durable goods whenever they have little doubt on the future value of the good. As uncertainty grows, renting becomes more prevalent. Pairwise matching alone is sufficient to explain why agents prefer to rent, and there is no need to introduce random matching, information asymmetries, or other market frictions.
Cite this item
Cyril Monnet & Borghan N. Narajabad, Why Rent When You Can Buy?, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2017-094, 22 Sep 2017.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
Keywords: Bargaining ; Bilateral matching ; Over-the-counter market ; Rent ; Repo ; Security lending ; Directed search
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