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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)
January 2007

CEPR Discussion Paper No. 6040

Abstract:     
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 defaults

working papers series


Date posted: June 27, 2007  

Suggested Citation

Hvide, Hans K. and Leite, Tore E., Optimal Debt Contracts Under Costly Enforcement (January 2007). CEPR Discussion Paper No. 6040. Available at SSRN: http://ssrn.com/abstract=996911

Contact Information

Hans Hvide (Contact Author)
University of Bergen - Department of Economics ( email )
Fosswinckelsgt. 6
N-5007 Bergen
Norway
University of Aberdeen - Business School ( email )
Edward Wright Building
Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom
HOME PAGE: http://hans.hvide.googlepages.com/
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Institute for the Study of Labor (IZA) ( email )
P.O. Box 7240
Bonn, D-53072
Germany
Tore E. Leite
Norwegian School of Economics (NHH) ( email )
Helleveien 30
N-5045 Bergen
Norway
+47 5595 9343 (Phone)
+47 5595 9841 (Fax)
Feedback to SSRN (Beta)


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References:  28
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