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Why is there debt?

Author

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  • Jeffrey M. Lacker

Abstract

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.

Suggested Citation

  • Jeffrey M. Lacker, 1991. "Why is there debt?," Economic Review, Federal Reserve Bank of Richmond, issue Jul, pages 3-19.
  • Handle: RePEc:fip:fedrer:y:1991:i:jul:p:3-19:n:v.77no.4
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    File URL: https://fraser.stlouisfed.org/files/docs/publications/frbrichreview/rev_frbrich199107.pdf
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    References listed on IDEAS

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    1. 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 1345-1363, December.
    2. 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.
    3. 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..
    4. 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.
    5. Huberman, Gur & Kahn, Charles M., 1988. "Strategic renegotiation," Economics Letters, Elsevier, vol. 28(2), pages 117-121.
    6. 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.
    7. 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.
    8. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    9. 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.
    10. Spence, Michael & Zeckhauser, Richard, 1971. "Insurance, Information, and Individual Action," American Economic Review, American Economic Association, vol. 61(2), pages 380-387, May.
    11. Mark D. Flood, 1991. "An introduction to complete markets," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 32-57.
    12. Stiglitz, Joseph E, 1988. "Money, Credit, and Business Fluctuations," The Economic Record, The Economic Society of Australia, vol. 64(187), pages 307-322, December.
    13. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
    14. 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.
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    Citations

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    Cited by:

    1. Jain, Neelam, 2001. "Monitoring costs and trade credit," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(1), pages 89-110.
    2. Douglas W. Diamond, 1996. "Financial intermediation as delegated monitoring: a simple example," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 51-66.
    3. Jeffrey M. Lacker, 1994. "Does adverse selection justify government intervention in loan markets?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 61-95.
    4. Catherine Refait, 2005. "Soutien financier ou mise en faillite de l'entreprise? Comprendre la décision de la banque," Revue Finance Contrôle Stratégie, revues.org, vol. 8(1), pages 131-157, March.
    5. Arbel, Yonathan A., 2016. "Shielding of assets and lending contracts," International Review of Law and Economics, Elsevier, vol. 48(C), pages 26-35.

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    Keywords

    Debt;

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