Optimal Debt Contracts Under Costly Enforcement
Hans K. Hvide
University of Bergen - Department of Economics; University of Aberdeen - Business School; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)
Tore E. Leite
Norwegian School of Economics (NHH)
CEPR Discussion Paper No. 6040
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 behaviour in credit markets.
Number of Pages in PDF File: 26
Keywords: Costly state verification, debt contract, priority violation, strategic defaultsworking papers series
Date posted: June 27, 2007
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo7 in 0.781 seconds