Optimal debt contracts under costly enforcement
AbstractWe consider a financing game with costly enforcement based on Townsend (1979), but where monitoring is non-contractible and allowed to be stochastic. Debt is the optimal contract. Moreover, the debt contract induces creditor leniency and strategic defaults by the borrower on the equilibrium path, consistent with empirical evidence on repayment and monitoring behaviour in credit markets.
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Bibliographic InfoArticle provided by Springer in its journal Economic Theory.
Volume (Year): 44 (2010)
Issue (Month): 1 (July)
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Web page: http://link.springer.de/link/service/journals/00199/index.htm
Other versions of this item:
- D02 - Microeconomics - - General - - - Institutions: Design, Formation, and Operations
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
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