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Aggregate consequences of limited contract enforceability

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  • Thomas Cooley
  • Ramon Marimon
  • Vicenzo Quadrini

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.

Suggested Citation

  • Thomas Cooley & Ramon Marimon & Vicenzo Quadrini, 1999. "Aggregate consequences of limited contract enforceability," Economics Working Papers 843, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2003.
    • Handle: RePEc:upf:upfgen:843
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    More about this item

    Keywords

    Innovation; enforcement; aggregate fluctuations; development; financing innovation;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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