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Optimal Debt Contracts in Emerging Markets with Multiple Investors

  • Karel Janda

This paper extends the costly enforcement model of optimal financing to the case of investment projects financed by several lenders when the legal and economic situation in the emerging market economy does not allow for commitment to contracts and for securitization of credit contracts through use of collateral. We consider the asymmetric situation when only one lender is a big strategic investor. All other lenders are small passive investors. We first provide the sufficient and necessary condition for renegotiation proofness. Then we show that the optimal verification is deterministic. We also discuss the conditions under which the optimal contract is a debt contract. Our methodological framework may be used for example for the analysis of credit provision in food supply chains, where often many small non-strategic investors (small farm-level producers) interact with some big strategic investor (the advanced technology supplier) in the explicit or implicit crediting of some parts of food supply chain like the food processing plants or storage facilities.

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Article provided by University of Economics, Prague in its journal Prague Economic Papers.

Volume (Year): 2007 (2007)
Issue (Month): 2 ()
Pages: 115-129

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Handle: RePEc:prg:jnlpep:v:2007:y:2007:i:2:id:301:p:115-129
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  1. Chongwoo Choe, 1995. "Contract Design and Costly Verification Games," Working Papers 1995.18, School of Economics, La Trobe University.
  2. Stephen D. Williamson, 1984. "Costly Monitoring, Loan Contracts and Equilibrium Credit Rationing," Working Papers 572, Queen's University, Department of Economics.
  3. Tridib Sharma, 2003. "Optimal Contracts when Enforcement is a Decision Variable: A Comment," Econometrica, Econometric Society, vol. 71(1), pages 387-390, January.
  4. Claessens, Stijn & Klapper, Leora F., 2002. "Bankruptcy around the world - explanations of its relative use," Policy Research Working Paper Series 2865, The World Bank.
  5. Allan C. Eberhart & Lawrence A. Weiss, 1998. "The Importance of Deviations from the Absolute Priority Rule in Chapter 11 Bankruptcy Proceedings," Financial Management, Financial Management Association, vol. 27(4), Winter.
  6. Stefan Krasa & Tridib Sharma & Anne Villamil, 2008. "Bankruptcy and firm finance," Economic Theory, Springer, vol. 36(2), pages 239-266, August.
  7. Brunner, Antje & Krahnen, Jan Pieter, 2006. "Multiple lenders and corporate distress: Evidence on debt restructuring," CFS Working Paper Series 2001/04, Center for Financial Studies (CFS).
  8. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  9. Khalil, Fahad & Parigi, Bruno M, 1998. "Loan Size as a Commitment Device," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 135-50, February.
  10. Jeremy Berkowitz & Michelle J. White, 2004. "Bankruptcy and Small Firms' Access to Credit," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 69-84, Spring.
  11. Stefan Krasa & Anne P. Villamil, 2000. "Optimal Contracts when Enforcement Is a Decision Variable," Econometrica, Econometric Society, vol. 68(1), pages 119-134, January.
  12. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  13. Annamaria Menichini & Peter Simmons, 2001. "Are two investors better than one?," CSEF Working Papers 71, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  14. Stephen D. Williamson, 1984. "Costly Monitoring, Financial Intermediation, and Equilibrium Credit Rationing," Working Papers 583, Queen's University, Department of Economics.
  15. Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, vol. 69(4), pages 1077-98, July.
  16. Ondøej Knot & Ondøej Vychodil, 2005. "What Drives the Optimal Bankruptcy Law Design? (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 55(3-4), pages 110-123, March.
  17. M. Martin Boyer, 2001. "Project Financing when the Principal Cannot Commit," CIRANO Working Papers 2001s-29, CIRANO.
  18. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
  19. Stefan Krasa & Anne P. Villamil, 2003. "Optimal Contracts when Enforcement is a Decision Variable: A Reply," Econometrica, Econometric Society, vol. 71(1), pages 391-393, January.
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