Inefficient liquidity provision

John Geanakoplos and Kieran James Walsh ()
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John Geanakoplos: Yale University
Kieran James Walsh: University of Virginia Darden School of Business

Economic Theory, 2018, vol. 66, issue 1, No 8, 213-233

Abstract: Abstract We prove that in competitive market economies with no insurance for idiosyncratic risks, agents will always overinvest in illiquid long-term assets and underinvest in short-term liquid assets. We take as our setting the seminal model of Diamond and Dybvig (J Polit Econ 91(3):401–419, 1983), who first posed the question in a tractable model. We reach such a simple conclusion under mild conditions because we stick to the basic competitive market framework, avoiding the banks and intermediaries that Diamond and Dybvig (1983) and others introduced.

Keywords: Liquidity; Constrained inefficiency; Diamond–Dybvig models; Fire sales (search for similar items in EconPapers)
JEL-codes: D5 E43 E44 E6 G18 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s00199-017-1059-7

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