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Aggregate Consequences of Limited Contract Enforceability

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  • Cooley, Thomas F
  • Marimon, Ramon
  • Quadrini, Vincenzo

Abstract

We study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts. Because of enforceability problems, contracts are constrained efficient. We show that limited enforceability amplifies the impact of technological innovations on aggregate output. More generally, we show that lower enforceability of contracts will be associated with greater aggregate volatility. A key assumption for this result is that defaulting entrepreneurs are not excluded from the market.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4173.

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Date of creation: Jan 2004
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Handle: RePEc:cpr:ceprdp:4173

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Keywords: aggregate volatility; amplification; contract enforceability; G00;

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