Finance and Economics Discussion Series (FEDS)

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September 2017

Why Rent When You Can Buy?

Cyril Monnet and Borghan N. Narajabad

Abstract:

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.

Accessible materials (.zip)

Keywords: Bargaining, Bilateral matching, Over-the-counter market, Rent, Repo, Security lending, directed search

DOI: https://doi.org/10.17016/FEDS.2017.094

PDF: Full Paper

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Last Update: January 09, 2020