The net investment N(I) is only part of the investors’ date-0 contribution to the corporate sector. The corporate sector also purchases noncorporate assets {Lk}k=i,.. date 0. The investors’ date-0 outlay is thus
In equilibrium all claims commanding a liquidity premium [q^ > 1) must be held by the corporate sector (Lfc = Lfc), because consumers are risk neutral.
At date 1, the corporate sector selects a decision d = d(oo) from a feasible set D(uj, Ь(ш)) , where L(oj) is the net liquidity available to the corporate sector in state ш. The decision vector d includes all real decisions within the corporate sector such as reinvestments and production decisions for every firm. Implicitly, it also includes reallocations of liquidity among firms, required to support these real decisions. This presumes fully efficient financial contracting between firms in the corporate sector. For instance, scarce liquidity may be allocated efficiently at date 1 by financial intermediaries (see Holmstrom-Tirole 1998 for more detail). If the corporate sector does not pay insiders (entrepreneurs) anything at date 1 (see below), then

Recall that investors cannot commit to bringing in new funds at date 1 beyond the amount that is held in liquid assets L(oo).
For a given state ш, let R(I,u},d) denote the total expected intertemporal (date 1 plus date 2) payoff from illiquid corporate assets (in the example, R = 2 “1 x + by — \ — y). R includes pledgeable and nonpledgeable returns on illiquid assets, but excludes the return 011 noncorporate securities. Let d) denote the corresponding pledgeable income from illiquid assets, that is the expected intertemporal income that can be returned to investors (in the example, r(7, ш, d) = x — y). Accounting for noncorporate assets purchased at date 0, the corporate sector can return at most
denote the nonpledgeable portion of income. The fact that В > 0 is critical for generating a corporate demand for liquidity in our model.
Let t(oo) denote the amount of pledgeable income that is paid out (at date 1) to corporate insiders (entrepreneurs) in state ш. The net liquidity available for reinvestment in state ш is then — t(oo).

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