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Optimal contracts under imperfect enforcement revisited

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  • Hvide, Hans K.

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

Abstract

We consider a financing game with costly enforcement based on Townsend (1979), but where monitoring is non-contractible and allowed to be stochastic. Debt is the optimal contract. Moreover, the debt contract induces creditor leniency and strategic defaults by the borrower on the equilibrium path, consistent with empirical evidence on repayment and monitoring behavior in credit markets.

Suggested Citation

  • Hvide, Hans K., 2005. "Optimal contracts under imperfect enforcement revisited," Discussion Papers 2005/4, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2005_004
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    File URL: http://hdl.handle.net/11250/163590
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    References listed on IDEAS

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    More about this item

    Keywords

    Costly state verification; debt contract; priority violation; strategic defaults;
    All these keywords.

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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