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.

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