Liquidity and Inefficient Investment

Oliver Hart and Luigi Zingales

No 9537, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the role of fiscal policy in a complete markets model where the only friction is the non-pledgeability of human capital. We show that the competitive equilibrium is constrained inefficient, leading to too little risky investment. We also show that fiscal policy following a large negative shock can increase ex ante welfare. Finally, we show that if the government cannot commit to the promised level of fiscal intervention, the ex post optimal fiscal policy will be too small from an ex ante perspective.

Keywords: Aggregate shocks; Fiscal policy; Liquidity; Nonpledgeability; Pecuniary externalities (search for similar items in EconPapers)
JEL-codes: E41 E51 G21 (search for similar items in EconPapers)
Date: 2013-07
New Economics Papers: this item is included in nep-hrm, nep-mac and nep-mic
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: LIQUIDITY AND INEFFICIENT INVESTMENT (2015)
Working Paper: Liquidity and Inefficient Investment (2013)
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