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Default and Renegotiation: A Dynamic Model of Debt

  • Oliver Hart
  • John Moore

We analyse the role of debt in persuading an entrepreneur to pay out cash flows, rather than to divert them. In the first part of the paper we study the optimal debt contract - specifically, the trade-off between the size of the loan and the repayment - under the assumption that some debt contract is optimal. In the second part we consider a more general class of (non-debt) contracts, and derive sufficient conditions for debt to be optimal among these.

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Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Theoretical Economics Paper Series with number 321.

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Date of creation: Jan 1997
Date of revision:
Handle: RePEc:cep:stitep:321
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  1. Jeremy A.Rogoff Bulow & Kenneth, 1986. "A Constant Recontracting Model of Sovereign Debt," University of Chicago - George G. Stigler Center for Study of Economy and State 43, Chicago - Center for Study of Economy and State.
  2. Huberman, Gur & Kahn, Charles M., 1988. "Strategic renegotiation," Economics Letters, Elsevier, vol. 28(2), pages 117-121.
  3. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Oliver Hart & John Moore, 1997. "Default and Renegotiation: A Dynamic Model of Debt," Harvard Institute of Economic Research Working Papers 1792, Harvard - Institute of Economic Research.
  5. Franklin Allen, 1983. "Credit Rationing and Payment Incentives," Review of Economic Studies, Oxford University Press, vol. 50(4), pages 639-646.
  6. 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.
  7. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  9. Eric Maskin & John Moore, 1999. "Implementation and Renegotiation," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 39-56.
  10. Douglas W. Diamond, 1998. "Reputation Acquisition in Debt Markets," Levine's Working Paper Archive 602, David K. Levine.
  11. Harris, Milton & Raviv, Artur, 1995. "The Role of Games in Security Design," Review of Financial Studies, Society for Financial Studies, vol. 8(2), pages 327-67.
  12. Oliver Hart & John Moore, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 841-879.
  13. Erik Berglöf & Ernst-Ludwig von Thadden, 1994. "Short-Term versus Long-Term Interests: Capital Structure with Multiple Investors," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 1055-1084.
  14. Bolton, Patrick & Scharfstein, David S, 1996. "Optimal Debt Structure and the Number of Creditors," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 1-25, February.
  15. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
  16. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 647-663.
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