Inefficient Liquidity Provision

John Geanakoplos () and Kieran James Walsh ()
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John Geanakoplos: Cowles Foundation, Yale University, https://economics.yale.edu/people/faculty/john-geanakoplos
Kieran James Walsh: University of Virginia Darden School of Business

No 2077, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

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 (1983), who �rst 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 and others introduced.

Keywords: Liquidity; Constrained inefficiency; Diamond-Dybvig models; �re sales (search for similar items in EconPapers)
JEL-codes: D5 E43 E44 E6 G18 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2017-02
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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