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Credit rationing, bankruptcy cost, and the optimal debt contract for small business

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  • Ying Yan
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    Abstract

    An examination of whether the costly random verification scheme affects the optimal debt contract for small business. It finds, contrary to Townsend (1979) and Williamson (1986, 1987), that the standard debt contract is the optimal debt contract with the costly random verification scheme.

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    File URL: http://www.clevelandfed.org/research/workpaper/1997/wp9702.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9702.

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    Date of creation: 1997
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    Handle: RePEc:fip:fedcwp:9702

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    Keywords: Discrimination in consumer credit ; Bankruptcy ; Debt ; Small business;

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    1. Hillier, Brian & Ibrahimo, M V, 1993. "Asymmetric Information and Models of Credit Rationing," Bulletin of Economic Research, Wiley Blackwell, Wiley Blackwell, vol. 45(4), pages 271-304, October.
    2. David M Kreps & Robert Wilson, 2003. "Sequential Equilibria," Levine's Working Paper Archive 618897000000000813, David K. Levine.
    3. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, American Finance Association, vol. 32(2), pages 337-47, May.
    4. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
    5. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(3), pages 393-414, July.
    6. Jaffee, Dwight M & Russell, Thomas, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 90(4), pages 651-66, November.
    7. Philippe Aghion & Oliver D. Hart & John Moore, 1994. "The Economics of Bankruptcy Reform," NBER Chapters, in: The Transition in Eastern Europe, Volume 2: Restructuring, pages 215-244 National Bureau of Economic Research, Inc.
    8. Chan, Yuk-Shee & Kanatas, George, 1985. "Asymmetric Valuations and the Role of Collateral in Loan Agreements," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 17(1), pages 84-95, February.
    9. Stephen D. Williamson, 1984. "Costly Monitoring, Financial Intermediation, and Equilibrium Credit Rationing," Working Papers, Queen's University, Department of Economics 583, Queen's University, Department of Economics.
    10. Gilson, Stuart C. & John, Kose & Lang, Larry H. P., 1990. "Troubled debt restructurings*1: An empirical study of private reorganization of firms in default," Journal of Financial Economics, Elsevier, Elsevier, vol. 27(2), pages 315-353, October.
    11. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(4), pages 647-63, October.
    12. Berger, Allen N & Udell, Gregory F, 1992. "Some Evidence on the Empirical Significance of Credit Rationing," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(5), pages 1047-77, October.
    13. Besanko, David & Thakor, Anjan V, 1987. "Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 671-89, October.
    14. Ronald A. Dye, 1986. "Optimal Monitoring Policies in Agencies," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 339-350, Autumn.
    15. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report, Federal Reserve Bank of Minneapolis 45, Federal Reserve Bank of Minneapolis.
    16. Paul Asquith & Robert Gertner & David Scharfstein, 1991. "Anatomy of Financial Distress: An Examination of Junk-Bond Issuers," NBER Working Papers 3942, National Bureau of Economic Research, Inc.
    17. Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(2), pages 399-415, May.
    18. Boyd, John H & Smith, Bruce D, 1994. "How Good Are Standard Debt Contracts? Stochastic versus Nonstochastic Monitoring in a Costly State Verification Environment," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 67(4), pages 539-61, October.
    19. Webb, David C, 1987. "The Importance of Incomplete Information in Explaining the Existence of Costly Bankruptcy," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 54(215), pages 279-88, August.
    20. Gertner, Robert & Scharfstein, David, 1991. " A Theory of Workouts and the Effects of Reorganization Law," Journal of Finance, American Finance Association, American Finance Association, vol. 46(4), pages 1189-1222, September.
    21. Aivazian, Varouj A. & Callen, Jeffrey L., 1983. "Reorganization in bankruptcy and the issue of strategic risk," Journal of Banking & Finance, Elsevier, Elsevier, vol. 7(1), pages 119-133, March.
    22. Sris Chatterjee & Upinder S. Dhillon & Gabriel G. Ramirez, 1996. "Resolution of Financial Distress : Debt Restructurings via Chapter 11, Prepackaged Bankruptcies, and Workouts," Financial Management, Financial Management Association, Financial Management Association, vol. 25(1), Spring.
    23. Nahum D. Melumad & Dilip Mookherjee, 1989. "Delegation as Commitment: The Case of Income Tax Audits," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 139-163, Summer.
    24. Haugen, Robert A. & Senbet, Lemma W., 1988. "Bankruptcy and Agency Costs: Their Significance to the Theory of Optimal Capital Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 23(01), pages 27-38, March.
    25. Giammarino, Ronald M, 1989. "The Resolution of Financial Distress," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 2(1), pages 25-47.
    26. Brown, David T, 1989. "Claimholder Incentive Conflicts in Reorganization: The Role of Bankruptcy Law," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 2(1), pages 109-23.
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