Liquidity and Inefficient Investment
Working Paper 19184
DOI 10.3386/w19184
Issue Date
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.
Published Versions
Oliver Hart & Luigi Zingales, 2015. "LIQUIDITY AND INEFFICIENT INVESTMENT," Journal of the European Economic Association, vol 13(5), pages 737-769. citation courtesy of