Liquidity and Inefficient Investment

38 Pages Posted: 9 Jul 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)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2013

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

JEL Classification: E41, E51, G21

Suggested Citation

Hart, Oliver D. and Zingales, Luigi, Liquidity and Inefficient Investment (July 2013). CEPR Discussion Paper No. DP9537, Available at SSRN: https://ssrn.com/abstract=2291338

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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