Working Paper: NBER ID: w19184
Authors: Oliver D. Hart; Luigi Zingales
Abstract: We study the role of fiscal policy in a complete markets model where the only friction is the nonpledgeability 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: Fiscal Policy; Liquidity; Investment; Human Capital; Economic Inefficiency
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 |
|---|---|
| nonpledgeability of human capital (J24) | constrained inefficient competitive equilibrium (D59) |
| constrained inefficient competitive equilibrium (D59) | too little risky investment (G11) |
| fiscal policy following a large negative shock (E62) | enhanced ex ante welfare (D69) |
| government commitment to fiscal intervention (E62) | policy effectiveness (D78) |