Inside and Outside Liquidity by Bengt Holmström & Jean Tirole

Author:Bengt Holmström & Jean Tirole
Language: eng
Format: azw3
Tags: Finance, Business & Economics, General
ISBN: 9780262294782
Publisher: MIT Press
Published: 2011-01-07T01:04:15.862026+00:00

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In this Pareto program, the representative entrepreneur's expected utility is maximized subject to consumers being guaranteed some level of utility U. The reinvestment i(p) may be constrained either by the date-1 liquidity constraint (p - pi~)i < R(nn) or by the technological constraint i + tit < I.

Rather than solve the entire program, we will investigate whether reducing tit slightly by capping sales below the market level can improve welfare. To simplify matters, we assume that the entrepreneurs' endowment A is so large that the shadow value of the consumers' budget constraint is 1. In that case we can substitute the budget constraint into the objective function to obtain the maximand E[(p, - p)i(p) + S(in(p))l.

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