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The Role Of Collateral In A Model Of Debt Renegotiation

  • BESTER, H.

This paper studies the effect of debt renegotiation on the design of optimal loan arrangements in a model of borrowing and lending with asymmetric information. Renegotiation may occur because bankruptcy involves costly asset liquidation, which is ex post inefficient. The author shows that the extent of the entrepreneur's liabilities in the optimal loan contract depends upon the creditor's commitment to impose bankruptcy should default ever occur. A limited liability arrangement is optimal whenever the creditor is precommited not to forgive any portion of the outstanding debt. Otherwise debt may efficiently be secured by outside collateral. Copyright 1994 by Ohio State University Press.

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Paper provided by Tilburg - Center for Economic Research in its series Papers with number 9060.

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Length: 25 pages
Date of creation: 1990
Date of revision:
Handle: RePEc:fth:tilbur:9060
Contact details of provider: Postal: TILBURG UNIVERSITY, CENTER FOR ECONOMIC RESEARCH, 5000 LE TILBURG THE NETHERLANDS.
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