Finance Papers

Document Type

Working Paper

Date of this Version



In a general equilibrium economy with uninsurable aggregate liquidity shocks, we show that public information may trigger allocative inefficiency and liquidity crises. Entrepreneurs do not internalize the negative impact of their investment decisions on the equilibrium risk of liquidity shortage. A more informative public signal decreases the risk of a liquidity shock, but increases the risk of capital rationing conditional on a liquidity shock. In equilibrium, information quality has a non-monotonic effect on expected returns on investment and social welfare. An increase in the quality of public information has redistributive effects on welfare as entrepreneurs gain and financiers lose. Investment restrictions and targeted disclosure of information achieve constrained efficiency as competitive market equilibrium.


inefficient investment, liquidity crises, general equilibrium, social welfare, incomplete markets, public information, disclosure, regulation



Date Posted: 27 November 2017