Working Paper: CEPR ID: DP9537
Authors: Oliver Hart; Luigi Zingales
Abstract: We study the role of fiscal policy in a complete markets model where the only friction is the non-pledgeability of human capital. We show that the competitive equilibrium is constrained inefficient, leading to too little risky investment. We also show that fiscal policy following a large negative shock can increase ex ante welfare. Finally, we show that if the government cannot commit to the promised level of fiscal intervention, the ex post optimal fiscal policy will be too small from an ex ante perspective.
Keywords: aggregate shocks; fiscal policy; liquidity; nonpledgeability; pecuniary externalities
JEL Codes: E41; E51; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal policy (E62) | ex ante welfare (D69) |
| Government commitment (H11) | effectiveness of fiscal policy (E62) |
| Competitive equilibrium is constrained inefficient (D59) | too little risky investment (G11) |
| Lack of government commitment (H11) | misalignment between ex ante and ex post optimal policies (E61) |