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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.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 843.

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Date of creation: Jun 1999
Date of revision: Oct 2003
Handle: RePEc:upf:upfgen:843

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Web page: http://www.econ.upf.edu/

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Keywords: Innovation; enforcement; aggregate fluctuations; development; financing innovation;

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