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Financial congestion

Author

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  • Okat, Deniz

Abstract

Individuals have an increased incentive to invest when they know that they can sell their investments whenever they need funds. However, this increase in investments can also lead to a reduction in aggregate returns, as it exacerbates the negative externalities that individuals impose on each other whenever they invest. As a result, setting up a financial market that allows individuals to trade their assets may reduce welfare as it can amplify these negative externalities and lead to suboptimal investment decisions.

Suggested Citation

  • Okat, Deniz, 2024. "Financial congestion," Journal of Financial Markets, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:finmar:v:71:y:2024:i:c:s138641812400051x
    DOI: 10.1016/j.finmar.2024.100933
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    More about this item

    Keywords

    Financial markets; Welfare; Overinvestment; Braess paradox;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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