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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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Specialized Inputs and Secondary Markets

Specialized Inputs and Secondary Markets

(p.199) 8 Specialized Inputs and Secondary Markets
Inside and Outside Liquidity

Holmström Bengt

Tirole Jean

The MIT Press

The incentives for uncoordinated investments in specialized assets or widgets that can be used to rescue the operations of financially constrained agents are examined in this chapter. The chapter points out that widgets trade at a discount in the secondary market. The price discount raises concern that firms will not have the appropriate incentive to accumulate widgets. The chapter also points out that if the secondary-market price is low, a firm reselling unneeded widgets will face a capital loss. On the other hand, it is somehow cheaper to buy widgets in the second market than in the primary market. It then shows that when firms are ex ante identical and the only imperfection is their inability to coordinate in advance the purchase and the use of liquidity, the price of widgets will remain high enough to entice firms to hoard.

Keywords:   widgets, secondary-market price, liquidity, capital loss

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