A useful way to think of liquidity and illiquidity, proposed by Professor James Tobin, is in terms of how much sellers stand to lose if they wish to sell immediately as against engaging in a costly and time-consuming search.

Question

Quizplus · Accepted Answer

This statement accurately describes Professor James Tobin's perspective on liquidity and illiquidity. Tobin argued that the cost of search, which can include the time and effort required to find a buyer or determine the market price, can make selling illiquid assets more expensive than selling liquid ones. As a result, investors may be more likely to hold onto illiquid assets even if they would prefer to sell them, which can reduce the efficiency of financial markets. This idea is commonly referred to as Tobin's q theory of investment, and it highlights the importance of liquidity for ensuring that markets function smoothly and efficiently.

A Useful Way to Think of Liquidity and Illiquidity, Proposed