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Aggregate Consequences of Limited Contract Enforceability

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  • Thomas F. Cooley
  • Ramon Marimon
  • Vincenzo Quadrini

Abstract

We study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts. Because of enforceability problems, contracts are constrained efficient.We show that limited enforceability amplifies the impact of technological innovations on aggregate output. More generally, we show that lower enforceability of contracts will be associated with greater aggregate volatility. A key assumption for this result is that defaulting entrepreneurs are not excluded from the market.

Suggested Citation

  • Thomas F. Cooley & Ramon Marimon & Vincenzo Quadrini, 2003. "Aggregate Consequences of Limited Contract Enforceability," Working Papers 1, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:1
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    References listed on IDEAS

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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G0 - Financial Economics - - General

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