confined to project initiation, I find that: (1) when agents expect a liquidity dry-up on such markets, they optimally choose … to self-insure through the hoarding of non-productive but liquid assets; (2) such a response has negative externalities … as it reduces ex-post market participation, which worsens adverse selection and dries up market liquidity; (3) liquidity …

with liquidity constraint. Bankers screen real production projects and issue deposits. The liquidity constraint stems from … early withdrawals of deposits. To fill the liquidity gap, bankers sell assets on a secondary market. The paper argues that … easier to sell and generate liquidity benefits. In general equilibrium, exogenous aggregate productivity shocks are amplified …

leads to a large drop in the asset price, decreased leverage and reduced market liquidity. We show that the model can …