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.
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