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Working it out: Randomized Modification and Entrepreneurial Effort in a Collateralized Debt Market

Author

Listed:
  • Christopher Eaglin
  • Apoorv Gupta
  • Filippo Mezzanotti
  • Jonathan Zinman

Abstract

We enrich a standard debt overhang model with liquidity constraints to guide the design and interpretation of a collateralized debt modification experiment on a publicly traded lender’s delinquent vehicle loans to minibus entrepreneurs. Liquidity constraints add another borrower incentive compatibility constraint that interacts with debt overhang to shape repayment and effort. Consistent with model predictions, we find: debt reduction does not affect liquidity constrained borrowers; payment reduction improves both repayment and effort for borrowers with sufficient vehicle equity; payment reduction induces repayment without effort increases for low-equity borrowers. These results suggest a pecking order strategy for modification practice and policy.

Suggested Citation

  • Christopher Eaglin & Apoorv Gupta & Filippo Mezzanotti & Jonathan Zinman, 2025. "Working it out: Randomized Modification and Entrepreneurial Effort in a Collateralized Debt Market," NBER Working Papers 34398, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34398
    Note: CF DEV PR
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    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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