“Inefficient Liquidity Provision,” article by John Geanakoplos and Kieran James Walsh in Economic Theory (2017)
In this article, the authors prove that in competitive market economies with no insurance for idiosyncratic risks, agents will always overinvest in illiquid long-term assets and underinvest in short-term liquid assets. The authors take as their setting the seminal model of Diamond and Dybvig, who first posed the question in a tractable model.