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A Theory of Debt Based on the Inalienability of Human Capital

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  • Oliver Hart
  • John Moore

Abstract

Consider an entrepreneur whocneeds to raise funds from an investor, but cannot commit not to withdraw his human capital from the project. The possibility of a default or quit puts an upper bound on the total indebtedness from the entrepreneur to the investor at any date. We characterize the optimal repayment path and show how it is affected both by the maturity structure of the project return stream and by the durability and specificity of project assets. Our results are consistent with the conventional wisdom about what determines the maturity structure of (long-term) debt contracts.

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Bibliographic Info

Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Theoretical Economics Paper Series with number /1991/233.

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Date of creation: 1991
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Handle: RePEc:cep:stitep:/1991/233

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Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

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