The Role of Collateral in a Model of Debt Renegotiation
AbstractThis paper studies the effect of debt renegotiation on the design of optimal loan arrangements in a model of borrowing and lending with asymmetric information. Renegotiation may occur because bankruptcy involves costly asset liquidation, which is ex post inefficient. The author shows that the extent of the entrepreneur's liabilities in the optimal loan contract depends upon the creditor's commitment to impose bankruptcy should default ever occur. A limited liability arrangement is optimal whenever the creditor is precommited not to forgive any portion of the outstanding debt. Otherwise debt may efficiently be secured by outside collateral. Copyright 1994 by Ohio State University Press.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1990-60.
Date of creation: 1990
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Web page: http://center.uvt.nl
Other versions of this item:
- Bester, Helmut, 1994. "The Role of Collateral in a Model of Debt Renegotiation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 72-86, February.
- Helmut Bester, 1990. "The Role of Collateral in a Model of Debt Renegotiation," CEPR Financial Markets Paper 0001, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
- Bester, H., 1990. "The Role Of Collateral In A Model Of Debt Renegotiation," Papers 9060, Tilburg - Center for Economic Research.
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- Schwartz, Alan., . "Security Interests and Bankruptcy Priorities: A Review of Current Theories," Working Papers 334, California Institute of Technology, Division of the Humanities and Social Sciences.
- Raquel Fernandez & Robert W. Rosenthal, 1988.
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- Chan, Yuk-Shee & Kanatas, George, 1985. "Asymmetric Valuations and the Role of Collateral in Loan Agreements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(1), pages 84-95, February.
- Benjamin, Daniel K, 1978. "The Use of Collateral to Enforce Debt Contracts," Economic Inquiry, Western Economic Association International, vol. 16(3), pages 333-59, July.
- de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 281-92, May.
- Huberman, Gur & Kahn, Charles M., 1988. "Strategic renegotiation," Economics Letters, Elsevier, vol. 28(2), pages 117-121.
- Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May.
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