Debt Contracts with Short-Term Commitment
AbstractThis paper analyzes the role of short-term commitment by the lender in a dynamic relationship where the borrower cannot be legally forced to make repayments. I show that short-term commitment can decrease social welfare compared to both the full and no-commitment cases considered by most of the literature. I show that the size of investment is positively related to the borrower's income. In addition, both underinvestment and overinvestment can occur in equilibrium. I also introduce the borrower's outside option and do comparative statics with respect to it. I show that the social welfare is non-monotonic in the borrower's outside option. If the borrower's outside option is interpreted as a measure of competitiveness of the credit market, this implies that an increase in the strength of competition has an ambiguous effect on welfare. Furthermore, numerical results suggest that as the outside option of the borrower increases, the renegotiation-proof equilibria converge to the Markov equilibrium, where the agents' strategies depend only on the borrower's liquidity. That is, the welfare gain from using complicated history-dependent strategies instead of simple Markov strategies is small when the borrower's outside option is high.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 558.
Date of creation: 2008
Date of revision:
Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Schnitzer, Monika, 1999.
"Expropriation and control rights: A dynamic model of foreign direct investment,"
International Journal of Industrial Organization,
Elsevier, vol. 17(8), pages 1113-1137, November.
- Schnitzer, Monika, 1998. "Expropriation and Control Rights: A Dynamic Model of Foreign Direct Investment," CEPR Discussion Papers 1891, C.E.P.R. Discussion Papers.
- Thomas, J. & Worral, T., 1991.
"Foreign Direcyt Investment and the Risk of Expropriation,"
9126, Tilburg - Center for Economic Research.
- Thomas, Jonathan & Worrall, Tim, 1994. "Foreign Direct Investment and the Risk of Expropriation," Review of Economic Studies, Wiley Blackwell, vol. 61(1), pages 81-108, January.
- Thomas, J. & Worrall, T., 1990. "Foreign Direct Investment And The Risk Of Expropriation," The Warwick Economics Research Paper Series (TWERPS) 342, University of Warwick, Department of Economics.
- Thomas, J. & Worrall, T., 1991. "Foreign direct investment and the risk of expropriation," Discussion Paper 1991-26, Tilburg University, Center for Economic Research.
- Thomas, Jonathan & Worrall, Tim, 1990. "Foreign direct investment and the risk of expropriation," Kiel Working Papers 411, Kiel Institute for the World Economy.
- Doyle, Christopher & van Wijnbergen, Sweder, 1984.
"Taxation of Foreign Multinationals: A Sequential Bargaining Approach to Tax Holidays,"
CEPR Discussion Papers
25, C.E.P.R. Discussion Papers.
- Chris Doyle & Sweder Wijnbergen, 1994. "Taxation of foreign multinationals: A sequential bargaining approach to tax holidays," International Tax and Public Finance, Springer, vol. 1(3), pages 211-225, October.
- Natalia Kovrijnykh & BalÃ¡zs Szentes, 2007. "Equilibrium Default Cycles," Journal of Political Economy, University of Chicago Press, vol. 115, pages 403-446.
- Rui Albuquerque & Hugo Hopenhayn, 2002.
"Optimal Lending Contracts and Firm Dynamics,"
RCER Working Papers
493, University of Rochester - Center for Economic Research (RCER).
- Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
- Eckhard Janeba, 2001.
"Attracting FDI in a Politically Risky World,"
NBER Working Papers
8400, National Bureau of Economic Research, Inc.
- Andrew Atkeson, 2010.
"International lending with moral hazard and risk of repudiation,"
Levine's Working Paper Archive
200, David K. Levine.
- Atkeson, Andrew, 1991. "International Lending with Moral Hazard and Risk of Repudiation," Econometrica, Econometric Society, vol. 59(4), pages 1069-89, July.
- Ray Debraj, 1994. "Internally Renegotiation-Proof Equilibrium Sets: Limit Behavior with Low Discounting," Games and Economic Behavior, Elsevier, vol. 6(1), pages 162-177, January.
- repec:ner:ucllon:http://discovery.ucl.ac.uk/17379/ is not listed on IDEAS
- Quadrini, Vincenzo, 2004. "Investment and liquidation in renegotiation-proof contracts with moral hazard," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 713-751, May.
- Fohlin, Caroline, 1996.
"Relationship Banking, Liquidity, and Investment in the German Industrialization,"
913, California Institute of Technology, Division of the Humanities and Social Sciences.
- Caroline Fohlin, 1998. "Relationship Banking, Liquidity, and Investment in the German Industrialization," Journal of Finance, American Finance Association, vol. 53(5), pages 1737-1758, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).
If references are entirely missing, you can add them using this form.