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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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File URL: https://fraser.stlouisfed.org/files/docs/publications/frbrichreview/rev_frbrich199107.pdf
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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. William G. Gale, 1989. "Collateral, Rationing, and Government Intervention in Credit Markets," NBER Working Papers 3024, National Bureau of Economic Research, Inc.
  2. Lacker, Jeffrey M & Weinberg, John A, 1989. "Optimal Contracts under Costly State Falsification," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1345-63, December.
  3. 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.
  4. 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.
  5. Roger B. Myerson, 1977. "Incentive Compatability and the Bargaining Problem," Discussion Papers 284, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. 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.
  7. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  8. Spence, Michael & Zeckhauser, Richard, 1971. "Insurance, Information, and Individual Action," American Economic Review, American Economic Association, vol. 61(2), pages 380-87, May.
  9. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  10. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
  11. Stiglitz, Joseph E, 1988. "Money, Credit, and Business Fluctuations," The Economic Record, The Economic Society of Australia, vol. 64(187), pages 307-22, December.
  12. Mark D. Flood, 1991. "An introduction to complete markets," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 32-57.
  13. Huberman, Gur & Kahn, Charles M., 1988. "Strategic renegotiation," Economics Letters, Elsevier, vol. 28(2), pages 117-121.
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