NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Liquidity and Inefficient Investment

Oliver D. Hart, Luigi Zingales

NBER Working Paper No. 19184
Issued in June 2013
NBER Program(s):   CF   EFG   ME

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.

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Document Object Identifier (DOI): 10.3386/w19184

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