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Strategic Default Jump as Impulse Control in Continuous Time

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Author Info
Hisashi Nakamura (Faculty of Economics, University of Tokyo)
Abstract

This paper presents a new approach for modeling an optimal debt contract in continuous time. It examines a competing contract design in a continuous-time environment with Markov income shocks and costly veri able information. It shows that an optimal contract has the form of a long-term debt contract that permits a debtor's strategic default and debt restructuring. The default is characterized by a recurrent, optimal impulse control beyond default. Numerical examples show that the equilibrium probability of the default is decreasing in the monitoring technology level when the default causes a big wealth loss.

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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-532.

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Length: 28 pages
Date of creation: Dec 2007
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Handle: RePEc:tky:fseres:2007cf532

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