29.11 Business and Policy Application: Increased Liquidity, Procrastination, and National Savings: Over the past few decades, increasingly sophisticated financial investment possibilities have enabled individuals to place their savings into assets that can be sold instantly if need be as opposed to investments in more “illiquid” assets like land, assets that require time and effort to convert to cash.

A. Consider individual 1 whose intertemporal tastes can be characterized by the beta-delta model versus individual 2 whose intertemporal tastes are characterized in the more usual neoclassical “delta”

model. Both individuals just inherited some money and intend to invest this for their retirement.

a. Could an increase in the availability of liquid assets for investment purposes make individual 2 better off? Could it make individual 2 worse off?

b. Now consider individual 1. Suppose this individual consults an investment planner who has observed this individual’s past savings and consumption decisions and recommends an investment strategy. Why might the investment planner recommend a strategy that focuses on illiquid assets?