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Aggregate Consequences of Limited Contract Enforceability

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Author Info
Thomas Cooley
Ramon Marimon
Vincenzo Quadrini

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Abstract

We study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts. Because of enforceability problems, contracts are constrained efficient. We show that limited enforceability amplifies the impact of technological innovations on aggregate output. More generally, we show that lower enforceability of contracts will be associated with greater aggregate volatility. A key assumption for this result is that defaulting entrepreneurs are not excluded from the market.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10132.

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Date of creation: Dec 2003
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Handle: RePEc:nbr:nberwo:10132

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E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
G0 - Financial Economics - - General

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