Optimal Debt Contracts with Renegotiation
AbstractThis paper sutudies the role of debt in committing a seller not to trade at a low price. We consider a discrete-time finite-horizon buyer-seller relationship. The seller makes an upfront relationship-specific investment, which is financed with debt. Debt then is repaid gradually to mitigate the hold-up risk. Even though debt is renegotiable, under the assumption that with a small probability renegotiation may fail and may lead to inefficient liquidation, debt still can be used as a commitment device. We solve for renegotiation proof dynamic debt contracts that are optimal for the seller and show that debt is repaid over the entire course of the relationship with declining repayments. Copyright Blackwell Publishing 2004.
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.
Volume (Year): 13 (2004)
Issue (Month): 4 (December)
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Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/
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- Usman, Murat, 2008. "Commitment with renegotiable debt contracts and verifiable cash flow," Economics Letters, Elsevier, vol. 99(2), pages 249-251, May.
- Card, David & Devicienti, Francesco & Maida, Agata, 2011.
"Rent-Sharing, Hold-up, and Wages: Evidence from Matched Panel Data,"
IZA Discussion Papers
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- David Card & Francesco Devicienti & Agata Maida, 2014. "Rent-sharing, Holdup, and Wages: Evidence from Matched Panel Data," Review of Economic Studies, Oxford University Press, vol. 81(1), pages 84-111.
- David Card & Francesco Devicienti & Agata Maida, 2010. "Rent-sharing, Holdup, and Wages: Evidence from Matched Panel Data," NBER Working Papers 16192, National Bureau of Economic Research, Inc.
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