Margin calls, re sales, and information constrained optimality

Protection buyers share risk with protection sellers, whose assets are only imperfectly pledgeable because of moral hazard. To mitigate moral hazard, privately optimal contracts involve variation margins. When margins are called, protection sellers must sell some of their assets to other investors. We analyse, in a general equilibrium framework, whether this leads to ine¢ cient …re sales. If markets are complete, so that investors buying in a …re sale interim can also trade ex ante with protection buyers, equilibrium is information-constrained e¢ cient. Otherwise, privately optimal margin calls and asset sales are ine¢ ciently high. To avoid ine¢ cient …resales, public policy should facilitate ex-ante contracting among all relevant counterparties.