Advanced Search
MyIDEAS: Login to save this article or follow this journal

Debt Contract, Strategic Default, and Optimal Penalties with Judgement Errors

Contents:

Author Info

  • David Alary

    ()
    (University Paris Dauphine)

  • Christian Gollier

    (University of Toulouse)

Abstract

We characterize the competitive equilibrium on the credit market when borrowers can strategically default. We assume that the audit is subject of errors of the two types and that lenders cannot commit ex-ante. We determine the penalty, the loan rate, the audit and strategic default probabilities. Borrowers' limited liability is endogenous when "judicial errors" exist, strategic default appears at equilibrium depending on the borrowers' absolute risk aversion. We show that at equilibrium loan contracts exhibit a penalty such that borrowers never strategically default. This is true with IARA and CARA utility function. Finally, we show that with DARA, strategic default may exist.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.aeconf.net/Articles/Nov2004/aef050210.pdf
Download Restriction: no

File URL: http://down.aefweb.net/AefArticles/aef050210.pdf
Download Restriction: no

Bibliographic Info

Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 5 (2004)
Issue (Month): 2 (November)
Pages: 357-372

as in new window
Handle: RePEc:cuf:journl:y:2004:v:5:i:2:p:357-372

Contact details of provider:
Web page: http://www.aeconf.net/
More information through EDIRC

Related research

Keywords: Strategic default; Imperfect audit; Fine; Consumer credit;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Gary S. Becker, 1968. "Crime and Punishment: An Economic Approach," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 76, pages 169.
  2. Simmons, Peter & G Garino, 2003. "Truth-telling and the Role of Limited Liability in Costly State Verification Loan Contracts," Royal Economic Society Annual Conference 2003, Royal Economic Society 188, Royal Economic Society.
  3. Stigler, George J, 1970. "The Optimum Enforcement of Laws," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 78(3), pages 526-36, May-June.
  4. Border, Kim C & Sobel, Joel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 54(4), pages 525-40, October.
  5. Polinsky, Mitchell & Shavell, Steven, 1979. "The Optimal Tradeoff between the Probability and Magnitude of Fines," American Economic Review, American Economic Association, American Economic Association, vol. 69(5), pages 880-91, December.
  6. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
  7. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, Elsevier, vol. 21(2), pages 265-293, October.
  8. Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(2), pages 399-415, May.
  9. Khalil, Fahad & Parigi, Bruno M, 1998. "Loan Size as a Commitment Device," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 135-50, February.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Samaresh Bardhan & Vivekananda Mukherjee, 2013. "Willful Default In Developing Country Banking System: A Theoretical Exercise," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, Chung-Ang Unviersity, Department of Economics, vol. 38(4), pages 101-121, December.
  2. Ming Chang & Chiu Lin & Dachrahn Wu, 2008. "Piracy and limited liability," Journal of Economics, Springer, Springer, vol. 95(1), pages 25-53, October.
  3. Jarko Fidrmuc & Pavel Ciaian & d'Artis Kancs & Jan Pokrivcak, 2011. "Credit Constraints, Heterogeneous Firms and Loan Defaults," EERI Research Paper Series, Economics and Econometrics Research Institute (EERI), Brussels EERI_RP_2011_17, Economics and Econometrics Research Institute (EERI), Brussels.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cuf:journl:y:2004:v:5:i:2:p:357-372. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Qiang Gao).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.