Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/144397
Authors: 
Malherbe, Frédéric
Year of Publication: 
2010
Series/Report no.: 
Working Paper Research 185
Abstract: 
Secondary markets for long-term assets might be illiquid due to adverse selection. In a model in which moral hazard is confined to project initiation, I find that: (1) when agents expect a liquidity dry-up on such markets, they optimally choose to self-insure through the hoarding of non-productive but liquid assets; (2) such a response has negative externalities as it reduces ex-post market participation, which worsens adverse selection and dries up market liquidity; (3) liquidity dry-ups are Pareto inefficient equilibria; (4) the Government can rule them out. Additionally, when agents face idiosyncratic, privately known, illiquidity shocks, I show that: (5) it increases market liquidity; (6) illiquid agents are better-off when they can credibly disclose their liquidity position, but transparency has an ambiguous effect on risk-sharing possibilities.
Subjects: 
Liquidity
Liquidity Dry-ups
Financial Crises
Hoarding
Adverse Selection
Self-insurance
JEL: 
E44
G01
G11
Document Type: 
Working Paper

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