DP9537 Liquidity and Inefficient Investment
|Author(s):||Oliver Hart, Luigi Zingales|
|Publication Date:||July 2013|
|Keyword(s):||aggregate shocks, fiscal policy, liquidity, nonpledgeability, pecuniary externalities|
|JEL(s):||E41, E51, G21|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=9537|
We study the role of fiscal policy in a complete markets model where the only friction is the non-pledgeability 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.