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Optimal lending contracts with long run borrowing constraints

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  • Li, Shuyun May
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    Abstract

    This paper discusses two variations to the optimal lending contract under asymmetric information studied in Clementi and Hopenhayn (2006). One variation assumes that the entrepreneur is less patient than the bank, and the other assumes the bank has limited commitment. The qualitative properties of the two modified contracts are very similar. In particular, both variations lead to borrowing constraints that are always binding such that the firm is financially constrained throughout its life cycle and subject to a positive probability of being liquidated eventually.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 37 (2013)
    Issue (Month): 5 ()
    Pages: 964-983

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    Handle: RePEc:eee:dyncon:v:37:y:2013:i:5:p:964-983

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    Web page: http://www.elsevier.com/locate/jedc

    Related research

    Keywords: Optimal lending contract; Borrowing constraints; Asymmetric information; Limited commitment; Impatient entrepreneur;

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