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Optimal Financial Contracts

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  • Dowd, Kevin

Abstract

This paper investigates the structure of optimal financial contracts and the main factors that influence it--verification and monitoring costs, moral hazard, agents' wealth limitations, and their attitudes to risk. It suggests that the optimality of debt contracts with costly bankruptcy is more robust than some have recently suggested and discusses how recent literature is able to explain features of debt contracts such as coupon payments, covenant restrictions, the distinction between default and liquidation, maturity structure, collateral, and credit rationing. It also examines the optimality of equity and discusses circumstances where the optimal contract is neither debt nor equity. Copyright 1992 by Royal Economic Society.

Suggested Citation

  • Dowd, Kevin, 1992. "Optimal Financial Contracts," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 672-693, October.
    • Handle: RePEc:oup:oxecpp:v:44:y:1992:i:4:p:672-93
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    Cited by:

    1. Swinnen, Johan F. M. & Gow, Hamish R., 1999. "Agricultural credit problems and policies during the transition to a market economy in Central and Eastern Europe," Food Policy, Elsevier, vol. 24(1), pages 21-47, February.
    2. Petrick, Martin & Latruffe, Laure, 2005. "The Determinants of Polish Farmers' Credit Interest Rates: Hedonic Price Analysis and Implications for Government Policy," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24757, European Association of Agricultural Economists.
    3. Zhixiong Zeng, 2007. "The price of size and financial market allocations," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 30(1), pages 21-48, January.
    4. Boucher, Steve & Carter, Michael R. & Guirkinger, Catherine, 2005. "Risk Rationing and Wealth Effects in Credit Markets," Working Papers 190912, University of California, Davis, Department of Agricultural and Resource Economics.
    5. Mervyn K. Lewis, 2014. "A theoretical perspective on Islamic banking and financial intermediation," Chapters, in: Mervyn K. Lewis & Mohamed Ariff & Shamsher Mohamad (ed.), Risk and Regulation of Islamic Banking, chapter 2, pages 11-42, Edward Elgar Publishing.
    6. Baer, Werner & Hargis, Kent, 1997. "Forms of external capital and economic development in Latin America: 1820-1997," World Development, Elsevier, vol. 25(11), pages 1805-1820, November.
    7. Temesgen Belissa & Robert Lensink & Anne Winkel, 2020. "Effects of Index Insurance on Demand and Supply of Credit: Evidence from Ethiopia," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(5), pages 1511-1531, October.
    8. K.P. Krishnan & Venkatesh Panchapagesan & Madalasa Venkataraman, 2016. "Distortions in land markets and their implications to credit generation in India," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2016-005, Indira Gandhi Institute of Development Research, Mumbai, India.
    9. Jauling Tseng, 2021. "How do finance companies' advantages affect competitive strategies in short‐ and intermediate‐term loan markets? A theoretical analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 4295-4302, July.
    10. Andersen, Thomas Barnebeck & Malchow-Moller, Nikolaj, 2006. "Strategic interaction in undeveloped credit markets," Journal of Development Economics, Elsevier, vol. 80(2), pages 275-298, August.
    11. K.P. Krishnan & Venkatesh Panchapagesan & Madalasa Venkataraman, 2016. "Distortions in Land Markets and their Implications to Credit Generation in India," Working Papers id:10562, eSocialSciences.
    12. Tanimoune, Nasser Ary, 2007. "Système financier dualiste et impacts des politiques financières : essai de modélisation," L'Actualité Economique, Société Canadienne de Science Economique, vol. 83(1), pages 55-70, mars.
    13. Gangopadhyay, Shubhashis & Mukhopadhyay, Bappaditya, 2002. "Multiple bank lending and seniority in claims," Journal of Economics and Business, Elsevier, vol. 54(1), pages 7-30.
    14. Tseng, Jauling, 1996. "Farmer-borrowers' selection of short- and intermediate-term loan contracts: traditional lenders versus nontraditional lenders," ISU General Staff Papers 1996010108000012129, Iowa State University, Department of Economics.
    15. Gin, Xavier & Yang, Dean, 2009. "Insurance, credit, and technology adoption: Field experimental evidencefrom Malawi," Journal of Development Economics, Elsevier, vol. 89(1), pages 1-11, May.
    16. Vauhkonen, Jukka, 2003. "Are adverse selection models of debt robust to changes in market structure?," Bank of Finland Research Discussion Papers 28/2003, Bank of Finland.

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