Underemployment with liquidity-constrained multi-period firms (Q1100992)

\textit{S. Grossman} and \textit{O. D. Hart} [Amer. Econ. Rev. 71, 301-307 (1981)] have shown that underemployment can occur if firms are risk averse and have better information than workers. \textit{C. Kahn} and \textit{J. Scheinkman} [J. Econ. Theory 35, 343-365 (1985; Zbl 0573.90007)] replace the assumption of risk aversion with the more basic assumption of limited liability, but they obtain risk-averse behaviour only when the liquidity constraint is currently binding. A T-period model is developed here to show that firms will also display risk aversion if the liquidity constraint might become binding in the future.