We analyze the constrained-efficient allocation in an equilibrium model of investment and capital reallocation with heterogeneous firms facing collateral constraints. The features two types pecuniary externalities: externalities, because resale price affects firms’ ability to borrow, distributive buyers old are more financially constrained than sellers, consistent empirical evidence. show analy...

Cooperation in a large society of self-interested individuals is notoriously difficult to achieve when the externality of one individual's action is spread thin and wide on the whole society. This leads to the 'tragedy of the commons' in which rational action will ultimately make everyone worse-off. Traditional policies to promote cooperation involve Pigouvian taxation or subsidies that make in...