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Inside and Outside Liquidity$
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Bengt Holmstrom and Jean Tirole

Print publication date: 2011

Print ISBN-13: 9780262015783

Published to MIT Press Scholarship Online: August 2013

DOI: 10.7551/mitpress/9780262015783.001.0001

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Leverage

Leverage

Chapter:
(p.14) (p.15) 1 Leverage
Source:
Inside and Outside Liquidity
Author(s):

Holmström Bengt

Tirole Jean

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262015783.003.0002

This chapter explains how a simple credit rationing model can be used as a basic building block for liquidity analysis. It starts by using a version of the model where the investment scale is fixed. It then employed a constant-returns-to-scale version, which enables research in the critical trade-off between investment in scale and investment in liquidity, which credit-rationed firms eventually face. Finally, it presents a simple moral hazard paradigm with limited liability as an example and a reference point for future discussions.

Keywords:   credit rationing model, liquidity, investment, credit-rationed firms

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