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A Theory of Debt Based on the Inalienability of Human Capital

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  • Oliver Hart
  • John Moore

Abstract

Consider an entrepreneur whocneeds to raise funds from an investor, but cannot commit not to withdraw his human capital from the project. The possibility of a default or quit puts an upper bound on the total indebtedness from the entrepreneur to the investor at any date. We characterize the optimal repayment path and show how it is affected both by the maturity structure of the project return stream and by the durability and specificity of project assets. Our results are consistent with the conventional wisdom about what determines the maturity structure of (long-term) debt contracts.

Suggested Citation

  • Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," STICERD - Theoretical Economics Paper Series 233, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  • Handle: RePEc:cep:stitep:233
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    References listed on IDEAS

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    Cited by:

    1. Philippe Aghion & Oliver D. Hart & John Moore, 1994. "The Economics of Bankruptcy Reform," NBER Chapters,in: The Transition in Eastern Europe, Volume 2: Restructuring, pages 215-244 National Bureau of Economic Research, Inc.
    2. Petersen, Mitchell A & Rajan, Raghuram G, 1997. "Trade Credit: Theories and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 661-691.
    3. Li, David D. & Li, Shan, 1999. "An agency theory of the bankruptcy law," International Review of Economics & Finance, Elsevier, vol. 8(1), pages 1-24, January.
    4. Kiminori Matsuyama, 2007. "Credit Traps and Credit Cycles," American Economic Review, American Economic Association, vol. 97(1), pages 503-516, March.
    5. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
    6. Honohan, Patrick*Vittas, Dimitri, 1996. "Bank regulation and the network paradigm : policy implications for developing and transition economies," Policy Research Working Paper Series 1631, The World Bank.
    7. Willem H. Buiter & Kenneth M. Kletzer, 1995. "Capital Mobility, Fiscal Policy, and Growth under Self-Financing of Human Capital Formation," Canadian Journal of Economics, Canadian Economics Association, vol. 28(s1), pages 163-194, November.
    8. Dachraoui, K. & Dionne, G., 1999. "Capital Structures and Compensation Policies," Papers 99-28, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
    9. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
    10. Brandon Julio & Woojin Kim & Michael Weisbach, 2007. "What Determines the Structure of Corporate Debt Issues?," NBER Working Papers 13706, National Bureau of Economic Research, Inc.
    11. Hale, Galina B & Razin, Assaf & Tong, Hui, 2007. "Creditor Protection and Stock Price Volatility," CEPR Discussion Papers 6540, C.E.P.R. Discussion Papers.
    12. Martel, Jocelyn, 1996. "Solutions au stress financier," L'Actualité Economique, Société Canadienne de Science Economique, vol. 72(1), pages 51-78, mars.
    13. Vincente Cuñat, 2000. "Trade Credit: Suppliers as Debt Collectors and Insurance Providers," FMG Discussion Papers dp365, Financial Markets Group.
    14. Douglas W. Diamond, 1994. "Corporate capital structure: the control roles of bank and public debt with taxes and costly bankruptcy," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 11-37.
    15. Jocelyn Martel, 1996. "Solutions au stress financier : Un survol de la littérature," CIRANO Working Papers 96s-03, CIRANO.
    16. Mariarosa Scarlata & Luisa Alemany, 2010. "Deal Structuring in Philanthropic Venture Capital Investments: Financing Instrument, Valuation and Covenants," Journal of Business Ethics, Springer, vol. 95(2), pages 121-145, September.

    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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