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Optimal debt contracts under costly enforcement

  • Hans Hvide

    ()

  • Tore Leite

    ()

We consider a financing game with costly enforcement based on Townsend (1979), but where monitoring is non-contractible and allowed to be stochastic. Debt is the optimal contract. Moreover, the debt contract induces creditor leniency and strategic defaults by the borrower on the equilibrium path, consistent with empirical evidence on repayment and monitoring behaviour in credit markets.

(This abstract was borrowed from another version of this item.)

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File URL: http://hdl.handle.net/10.1007/s00199-009-0461-1
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Article provided by Springer & Society for the Advancement of Economic Theory (SAET) in its journal Economic Theory.

Volume (Year): 44 (2010)
Issue (Month): 1 (July)
Pages: 149-165

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Handle: RePEc:spr:joecth:v:44:y:2010:i:1:p:149-165
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Order Information: Web: http://www.springer.com/economics/economic+theory/journal/199/PS2

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  1. Gale, Douglas & Hellwig, Martin, 1989. "Repudiation and Renegotiation: The Case of Sovereign Debt," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(1), pages 3-31, February.
  2. Anderson, Ronald W & Sundaresan, Suresh, 1996. "Design and Valuation of Debt Contracts," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 37-68.
  3. 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.
  4. Sanford J. Grossman & Motty Perry, 1986. "Sequential Bargaining Under Asymmetric Information," NBER Technical Working Papers 0056, National Bureau of Economic Research, Inc.
  5. Guillaume Carlier & Ludovic Renou, 2005. "Debt Contracts with ex-ante and ex-post Asymmetric Information: An Example," School of Economics Working Papers 2005-03, University of Adelaide, School of Economics.
  6. Winton, Andrew, 1995. "Costly State Verification and Multiple Investors: The Role of Seniority," Review of Financial Studies, Society for Financial Studies, vol. 8(1), pages 91-123.
  7. Stefan Krasa & Tridib Sharma & Anne Villamil, 2008. "Bankruptcy and firm finance," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 36(2), pages 239-266, August.
  8. David T. Brown & Brian A. Ciochetti & Timothy J. Riddiough, 2006. "Theory and Evidence on the Resolution of Financial Distress," Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1357-1397.
  9. 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.
  10. David Martimort & Lars Stole, 2001. "Common Agency Equilibria with Discrete Mechanisms and Discrete Types," CESifo Working Paper Series 572, CESifo Group Munich.
  11. Krasa, Stefan & Villamil, Anne P, 1994. "Optimal Multilateral Contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(2), pages 167-87, March.
  12. 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.
  13. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
  14. repec:dau:papers:123456789/7447 is not listed on IDEAS
  15. Mella-Barral, Pierre & Perraudin, William, 1997. " Strategic Debt Service," Journal of Finance, American Finance Association, vol. 52(2), pages 531-56, June.
  16. Guillaume Carlier & Ludovic Renou, 2005. "A costly state verification model with diversity of opinions," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 25(2), pages 497-504, 02.
  17. Stefan Krasa & Anne P. Villamil, 2000. "Optimal Contracts when Enforcement Is a Decision Variable," Econometrica, Econometric Society, vol. 68(1), pages 119-134, January.
  18. Kim C. Border & Joel Sobel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," Review of Economic Studies, Oxford University Press, vol. 54(4), pages 525-540.
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