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Bubbly Liquidity


  • Farhi, Emmanuel
  • Tirole, Jean


This paper analyzes the possibility and the consequences of asset price overvaluation in a dynamic economy where financially constrained firms demand and supply liquidity. Bubbles are more likely to emerge, the scarcer the supply of outside liquidity and the more limited the pledgeability of corporate income; they crowd investment in (out) when liquidity is abundant (scarce). We analyze the economic implications of firm heterogeneity, endogenous corporate governance, and stochastic bubbles. Finally we draw some implications for the way public policy could react to bubbles.

Suggested Citation

  • Farhi, Emmanuel & Tirole, Jean, 2009. "Bubbly Liquidity," TSE Working Papers 09-101, Toulouse School of Economics (TSE), revised Feb 2011.
  • Handle: RePEc:tse:wpaper:21965

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    References listed on IDEAS

    1. Farrell, Joseph & Saloner, Garth, 1986. "Installed Base and Compatibility: Innovation, Product Preannouncements, and Predation," American Economic Review, American Economic Association, vol. 76(5), pages 940-955, December.
    2. Doh‐Shin Jeon & Domenico Menicucci, 2011. "Interconnection among academic journal websites: multilateral versus bilateral interconnection," RAND Journal of Economics, RAND Corporation, vol. 42(2), pages 363-386, June.
    3. Paul Belleflamme & Francis Bloch, 2004. "Market sharing agreements and collusive networks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 387-411, May.
    4. Mark McCabe, 2004. "Information goods and endogenous pricing strategies: the case of academic journals," Economics Bulletin, AccessEcon, vol. 12(10), pages 1-11.
    5. repec:ebl:ecbull:v:12:y:2004:i:10:p:1-11 is not listed on IDEAS
    6. Antonio Cabrales & Antoni Calvó-Armengol, 2003. "Corporate Downsizing to Rebuild Team Spirit," Working Papers 183, Barcelona Graduate School of Economics.
    7. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
    8. Antonio Cabrales & Antoni Calvó-Armengol, 2007. "Corporate Downsizing to Rebuild Team Spirit: How Costly Voting Can Foster Cooperation," Journal of the European Economic Association, MIT Press, vol. 5(5), pages 1016-1042, September.
    9. Doh-Shin Jeon & Domenico Menicucci, 2008. "Interconnection among academic journal platforms: Multilateral versus bilateral interconnection," Economics Working Papers 1074, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2009.
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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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