Inefficient Provision of Liquidity

Oliver Hart and Luigi Zingales

No 8525, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study an economy where the lack of a simultaneous double coincidence of wants creates the need for a relatively safe asset (money). We show that, even in the absence of asymmetric information or an agency problem, the private provision of liquidity is inefficient. The reason is that liquidity affects prices and the welfare of others, and creators do not internalize this. This distortion is present even if we introduce lending and government money. To eliminate the inefficiency the government must restrict the creation of liquidity by the private sector.

Keywords: Banking; Liquidity; Money (search for similar items in EconPapers)
JEL-codes: E41 E51 G21 (search for similar items in EconPapers)
Date: 2011-08
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cba, nep-mac, nep-mic and nep-mon
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Citations: View citations in EconPapers (13)

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Working Paper: Inefficient Provision of Liquidity (2011)
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