Optimal contracts under imperfect enforcement revisited
We consider a financing game with costly enforcement based on Townsend (1979), but where monitoring is non-contractible and allowed to be stochastic. Debt is the optimal contract. Moreover, the debt contract induces creditor leniency and strategic defaults by the borrower on the equilibrium path, consistent with empirical evidence on repayment and monitoring behavior in credit markets.
|Date of creation:||12 Sep 2005|
|Contact details of provider:|| Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway|
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- Gregor Andrade & Steven N. Kaplan, 1998.
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- Mella-Barral, Pierre & Perraudin, William, 1997. " Strategic Debt Service," Journal of Finance, American Finance Association, vol. 52(2), pages 531-556, June.
- Pierre Mella-Barral & William R M Perraudin, 1993. "Strategic Debt Service," CEPR Financial Markets Paper 0039, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ..
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- Brown, David T, 1989. "Claimholder Incentive Conflicts in Reorganization: The Role of Bankruptcy Law," Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 109-123.
- David Martimort & Lars Stole, 2001. "Common Agency Equilibria with Discrete Mechanisms and Discrete Types," CESifo Working Paper Series 572, CESifo Group Munich. Full references (including those not matched with items on IDEAS)
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