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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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PRINTED FROM MIT PRESS SCHOLARSHIP ONLINE (www.mitpress.universitypressscholarship.com). (c) Copyright The MIT Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in MITSO for personal use.date: 27 September 2021

A Simple Model of Liquidity Demand

A Simple Model of Liquidity Demand

(p.27) 2 A Simple Model of Liquidity Demand
Inside and Outside Liquidity

Holmström Bengt

Tirole Jean

The MIT Press

The chapter examined the demand for liquidity in a simple extension of the two-period paradigm. Firms usually demand liquidity when they need to take a precautionary measure against credit rationing. Credit rationing occurs when a wedge between the pledgable income to investors and the total income to the firm happens. It concluded by showing how the implementation of the second-best policy depends on the ability of the investors to keep the firm from spending funds on unauthorized projects.

Keywords:   liquidity, two-period paradigm, credit rationing, second-best policy

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