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Why is there debt?

  • Jeffrey M. Lacker

Most loan repayment agreements are largely noncontingent, and yet standard economic theory predicts that they should be highly contingent. An explanation is offered that relies on imperfect information and collateral. The theory suggests that perhaps all debt contracts are implicitly collateralized.

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Article provided by Federal Reserve Bank of Richmond in its journal Economic Review.

Volume (Year): (1991)
Issue (Month): Jul ()
Pages: 3-19

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Handle: RePEc:fip:fedrer:y:1991:i:jul:p:3-19:n:v.77no.4
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  1. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  2. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  3. Roger B. Myerson, 1977. "Incentive Compatability and the Bargaining Problem," Discussion Papers 284, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
  5. William G. Gale, 1990. "Collateral, Rationing, and Government Intervention in Credit Markets," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 43-62 National Bureau of Economic Research, Inc.
  6. Lacker, J.M., 1989. "Optimal Contracts Under Costly State Falsification," Purdue University Economics Working Papers 956, Purdue University, Department of Economics.
  7. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  8. Jeffrey Lacker, 2001. "Collateralized Debt as the Optimal Contract," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 842-859, October.
  9. Stiglitz, Joseph E, 1988. "Money, Credit, and Business Fluctuations," The Economic Record, The Economic Society of Australia, vol. 64(187), pages 307-22, December.
  10. Spence, Michael & Zeckhauser, Richard, 1971. "Insurance, Information, and Individual Action," American Economic Review, American Economic Association, vol. 61(2), pages 380-87, May.
  11. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  12. Huberman, Gur & Kahn, Charles M., 1988. "Strategic renegotiation," Economics Letters, Elsevier, vol. 28(2), pages 117-121.
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