Liquidity and Inefficient Investment
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.
We would like to thank Nicola Gennaioli, Bengt Holmstrom, Anil Kashyap, Guido Lorenzoni, and Alp Simsek for helpful comments, and Kirill Borusyak for outstanding research assistance. Oliver Hart gratefully acknowledges financial support from the U.S. National Science Foundation through the National Bureau of Economic Research. Luigi Zingales gratefully acknowledges financial support from the Center for Research in Security Prices (CRSP), and the Initiative on Global Markets at the University of Chicago The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Oliver Hart & Luigi Zingales, 2015. "LIQUIDITY AND INEFFICIENT INVESTMENT," Journal of the European Economic Association, vol 13(5), pages 737-769. citation courtesy of