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Default and Renegotiation: A Dynamic Model of Debt

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  • Oliver Hart
  • John Moore

Abstract

We analyze the role of debt in persuading an entrepreneur to pay out cash flows, rather than to divert them. In the first part of the paper we study the optimal debt contract-specifically, the trade-off between the size of the loan and the repayment-under the assumption that some debt contract is optimal. In the second part we consider a more general class of (nondebt) contracts, and derive sufficient conditions for debt to be optimal among these. © 2000 the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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Bibliographic Info

Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1792.

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Date of creation: 1997
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Handle: RePEc:fth:harver:1792

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  1. Hart, Oliver & Moore, John, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(4), pages 841-79, November.
  2. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, American Economic Association, vol. 80(1), pages 93-106, March.
  3. Berglof, Erik & von Thadden, Ernst-Ludwig, 1994. "Short-Term versus Long-Term Interests: Capital Structure with Multiple Investors," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(4), pages 1055-84, November.
  4. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 495, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Maskin, Eric & Moore, John, 1999. "Implementation and Renegotiation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(1), pages 39-56, January.
  7. Allen, Franklin, 1983. "Credit Rationing and Payment Incentives," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 50(4), pages 639-46, October.
  8. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(4), pages 828-62, August.
  9. Hart, O. & Moore, J., 1989. "Default And Renegotiation: A Dynamic Model Of Debt," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 520, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(1), pages 155-78, February.
  11. Huberman, Gur & Kahn, Charles M., 1988. "Strategic renegotiation," Economics Letters, Elsevier, Elsevier, vol. 28(2), pages 117-121.
  12. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Gale, Douglas & Hellwig, Martin, 1989. "Repudiation and Renegotiation: The Case of Sovereign Debt," 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. 30(1), pages 3-31, February.
  14. Bolton, Patrick & Scharfstein, David S, 1996. "Optimal Debt Structure and the Number of Creditors," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(1), pages 1-25, February.
  15. Harris, Milton & Raviv, Artur, 1995. "The Role of Games in Security Design," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 8(2), pages 327-67.
  16. 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.
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