Liquidity and Inefficient Investment

37 Pages Posted: 29 Jun 2013

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: June 2013

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.

Suggested Citation

Hart, Oliver D. and Zingales, Luigi, Liquidity and Inefficient Investment (June 2013). NBER Working Paper No. w19184, Available at SSRN: https://ssrn.com/abstract=2287044

Oliver D. Hart (Contact Author)

Harvard University - Department of Economics ( email )

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Luigi Zingales

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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United Kingdom

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