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Liquidity and Inefficient Investment

Oliver Hart and Luigi Zingales ()

No 19184, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the role of fiscal policy in a complete markets model where the only friction is the nonpledgeability 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.

JEL-codes: E41 E51 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-hrm, nep-mac, nep-mic and nep-pbe
Date: 2013-06
Note: CF EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed

Published as Oliver Hart & Luigi Zingales, 2015. "LIQUIDITY AND INEFFICIENT INVESTMENT," Journal of the European Economic Association, vol 13(5), pages 737-769.

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