Inefficient Provision of Liquidity

39 Pages Posted: 1 Aug 2011

See all articles by Oliver Hart

Oliver Hart

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Luigi Zingales

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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Date Written: August 1, 2011

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: liquidity, money, banking

JEL Classification: E41 G21, E51

Suggested Citation

Hart, Oliver D. and Zingales, Luigi, Inefficient Provision of Liquidity (August 1, 2011). Chicago Booth Research Paper No. 11-27, Available at SSRN: https://ssrn.com/abstract=1900080 or http://dx.doi.org/10.2139/ssrn.1900080

Oliver D. Hart

Harvard University - Department of Economics ( email )

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Luigi Zingales (Contact Author)

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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