NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Liquidity and the Threat of Fraudulent Assets

Yiting Li, Guillaume Rocheteau, Pierre-Olivier Weill

NBER Working Paper No. 17500
Issued in October 2011
NBER Program(s):   AP   EFG   ME

We study an over-the-counter (OTC) market with bilateral meetings and bargaining where the usefulness of assets, as means of payment or collateral, is limited by the threat of fraudulent practices. We assume that agents can produce fraudulent assets at a positive cost, which generates endogenous upper bounds on the quantity of each asset that can be sold, or posted as collateral in the OTC market. Each endogenous, asset-specific, resalability constraint depends on the vulnerability of the asset to fraud, on the frequency of trade, and on the current and future prices of the asset. In equilibrium, the set of assets can be partitioned into three liquidity tiers, which differ in their resalability, their prices, their sensitivity to shocks, and their responses to policy interventions. The dependence of an asset's resalability on its price creates a pecuniary externality, which leads to the result that some policies commonly thought to improve liquidity can be welfare reducing.

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Document Object Identifier (DOI): 10.3386/w17500

Published: Yiting Li & Guillaume Rocheteau & Pierre-Olivier Weill, 2012. "⊇↛Liquidity and the Threat of Fraudulent Assets," Journal of Political Economy, University of Chicago Press, vol. 120(5), pages 000 - 000. citation courtesy of

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