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Aggregate Consequences of Limited Contract Enforceability

  • Cooley, Thomas F
  • Marimon, Ramon
  • Quadrini, Vincenzo

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4173.

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Date of creation: Jan 2004
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Handle: RePEc:cpr:ceprdp:4173
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  1. Albuquerque, R. & Hopenhayn, H.A., 1997. "Optimal Dynamic Lending Contracts with Imperfect Enforceability," RCER Working Papers 439, University of Rochester - Center for Economic Research (RCER).
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  5. den Haan, Wouter J. & Ramey, Garey & Watson, Joel, 2000. "Liquidity Flows and Fragility of business Enterprises," University of California at San Diego, Economics Working Paper Series qt3d899423, Department of Economics, UC San Diego.
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  20. Thomas F. Cooley & Vincenzo Quadrini, 2001. "Financial Markets and Firm Dynamics," American Economic Review, American Economic Association, vol. 91(5), pages 1286-1310, December.
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  22. Erwan Quintin, 2001. "Limited enforcement and the organization of production," Center for Latin America Working Papers 0601, Federal Reserve Bank of Dallas.
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  25. Levine, Ross, 1992. "Financial structures and economic development," Policy Research Working Paper Series 849, The World Bank.
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