Decentralized Production and Public Liquidity with Private Information

41 Pages Posted: 25 Jan 2015

See all articles by David Nachman

David Nachman

Georgia State University - Department of Finance

Stephen D. Smith

(Deceased)

Date Written: February 2000

Abstract

Firms with private information about the outcomes of production under uncertainty may face capital (liquidity) constraints that prevent them from attaining efficient levels of investment in a world with costly and/or imperfect monitoring. As an alternative, we examine the efficiency of a simple pooling scheme designed to provide a public (cooperative) supply of liquidity that results in the first best outcome for economic growth. We show that if, absent aggregate uncertainty, the elasticity of scale of the production technology is sufficiently small, then efficient levels of investment and growth can always be supported. Finally, some results for a special case (constant elasticity of scale) are examined when investors face aggregate uncertainty. We show that, in addition to a low elasticity of scale for the production function, investors must have sufficiently optimistic prior beliefs if efficient growth is to be achieved regardless of the actual future state of the world.

Keywords: private information, production economies, welfare analysis, liquidity

JEL Classification: D30, D50, D82, D92

Suggested Citation

Nachman, David Charles and Smith, Stephen Dewitt, Decentralized Production and Public Liquidity with Private Information (February 2000). FRB Atlanta Working Paper Series No. 2000-2. Available at SSRN: https://ssrn.com/abstract=2491241 or http://dx.doi.org/10.2139/ssrn.2491241

David Charles Nachman (Contact Author)

Georgia State University - Department of Finance ( email )

University Plaza
Atlanta, GA 30303-3083
United States
404-651-1696 (Phone)

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