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Optimal Deterministic Debt Contracts

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Abstract

This paper extends the costly enforcement model of optimal financing to the case of investment projects financed by several lenders. We consider the asymmetric situation when only one lender is a big strategic investor. All other lender are small passive investors. We first provide the sufficient and necessary condition for renegotiation proofness. Then we show that the optima verification is deterministic. We also discuss the conditions under which the optimal contract is a debt contract.

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File URL: http://ies.fsv.cuni.cz/default/file/download/id/8853
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Bibliographic Info

Paper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2006/25.

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Length: 25 pages
Date of creation: Oct 2006
Date of revision: Oct 2006
Handle: RePEc:fau:wpaper:wp2006_25

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Keywords: Costly State Verification; Multiple Lenders; Debt;

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  1. Helmut Bester & Roland Strausz, . "Imperfect Commitment and the Revelation Principle," Papers 004, Departmental Working Papers.
  2. Jeremy Berkowitz & Michelle J. White, 2004. "Bankruptcy and Small Firms' Access to Credit," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 69-84, Spring.
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Cited by:
  1. Karel Janda, 2006. "Lender and Borrower as Principal and Agent," Working Papers IES 2006/24, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jul 2006.

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