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Optimal Financial Contracts

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  • Dowd, Kevin

Abstract

This paper investigates the structure of optimal financial contracts and the main factors that influence it--verification and monitoring costs, moral hazard, agents' wealth limitations, and their attitudes to risk. It suggests that the optimality of debt contracts with costly bankruptcy is more robust than some have recently suggested and discusses how recent literature is able to explain features of debt contracts such as coupon payments, covenant restrictions, the distinction between default and liquidation, maturity structure, collateral, and credit rationing. It also examines the optimality of equity and discusses circumstances where the optimal contract is neither debt nor equity. Copyright 1992 by Royal Economic Society.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 44 (1992)
Issue (Month): 4 (October)
Pages: 672-93

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Handle: RePEc:oup:oxecpp:v:44:y:1992:i:4:p:672-93

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Cited by:
  1. Swinnen, Johan F. M. & Gow, Hamish R., 1999. "Agricultural credit problems and policies during the transition to a market economy in Central and Eastern Europe," Food Policy, Elsevier, Elsevier, vol. 24(1), pages 21-47, February.
  2. Gin, Xavier & Yang, Dean, 2009. "Insurance, credit, and technology adoption: Field experimental evidencefrom Malawi," Journal of Development Economics, Elsevier, Elsevier, vol. 89(1), pages 1-11, May.
  3. Zhixiong Zeng, 2007. "The price of size and financial market allocations," Economic Theory, Springer, Springer, vol. 30(1), pages 21-48, January.
  4. Andersen, Thomas Barnebeck & Malchow-Moller, Nikolaj, 2006. "Strategic interaction in undeveloped credit markets," Journal of Development Economics, Elsevier, Elsevier, vol. 80(2), pages 275-298, August.
  5. Vauhkonen, Jukka, 2003. "Are adverse selection models of debt robust to changes in market structure?," Research Discussion Papers, Bank of Finland 28/2003, Bank of Finland.

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